DHL To Restructure US Operations

From Modern Materials Handeling:

DHL Express U.S. announces restructuring plan

DHL plans to close some U.S. stations and contract with UPS for airport-to-airport transportation.

by Jeff Berman, Group News Editor -- Modern Materials Handling, 5/28/2008

After months of speculation regarding the future of DHL Express’s U.S. operations, parent company Deutsche Post World Net said today that it plans to significantly reduce DHL Express’s domestic footprint, although there are no plans to exit the U.S. market altogether.

In a press conference held earlier today at DPWN headquarters in Bonn, Germany, DPWN rolled out a series of initiatives for DHL Express U.S. operations. These initiatives include a plan to work with UPS on a 10-year, $10 billion contract for airlift capacity and a plan to reduce costs in ground infrastructure operations.

DPWN said DHL and UPS have agreed to develop a plan in which UPS will provide airlift for DHL Express U.S. domestic and international shipments from airport to airport within North America. (This contract is not yet finalized.) DHL currently uses ABX Air and Astar Air Cargo for these services. DPWN said this contract will provide DHL with a single airline partner in the U.S.
DPWN said its U.S. restructuring plan for DHL Express will materially reduce aviation costs through outsourcing to UPS;

• rationalize infrastructure by 34% by closing and consolidating U.S. stations in low density and remote areas;
• reduce pickup and linehaul delivery routes by 17%;
• reduce ground linehaul sectors by 18%.
  

Another component of the restructuring will include an expansion of DHL’s partnership with the United States Postal Service (USPS), which DPWN said will enable DHL to continue delivering to more rural parts of the country. This is expected to have a minimal impact on delivery services capabilities, according to DPWN, with less than 4% of pickup and delivery volumes expected to be affected, despite a significant cost reduction.

“There are not going to be any changes with our product offerings,” said DPWN CEO Frank Appel. “We are going to continue to work domestic air, domestic ground and global shipments…we will also use partners like the USPS for last-mile deliveries. This is a ripe path for our businesses, which will significantly reduce overall costs.”

Also included in the restructuring of U.S. operations are 1,500 to 1,800 job eliminations, according to DHL Express CEO John Mullen. When asked about how many domestic DHL stations would be shuttered, he declined to comment, instead referring to the announced 34% reduction through closing and consolidating stations.

These job eliminations follow a February announcement in which DHL Express U.S. reduced its workforce by approximately 600 positions.

Today’s news comes after wide speculation that DPWN would be re-evaluating its strategy for DHL Express U.S. In recent years, the company has struggled for market share, competing against UPS, FedEx and the USPS.

DHL Has a 600,000 SF Building in March AFB in Riverside, as well as a smaller center in Oxnard.

These buildings are not up for sublease yet, but I am waiting for it.

DHL has a very strong international market presence but here in the United States, DHL outsources most everything in a cobbled together network that was just not able to compete against UPS and FedEx.

DHL is the express delivery unit of Germany's Deutsche Post AG, and has been subsidized for a number of years for German delivery service. What is kinda funny is that DHL employees in the United States are not unionized, but UPS employees are.

DHL cannot totally escape the US market, since the United States is the main originator of international freight. It needs to be able to handle both sides of the equation, foreign and domestic, otherwise customers will go elsewhere.

Higher Inventories, but why?

From Modern Material Handeling:

Overseas sourcing pushes inventories higher

If you’re sourcing from overseas, inventory increases are inevitable, but they can be kept in check.

By Corinne Kator, Associate Editor -- Modern Materials Handling, 5/21/2008

While order fill rates and picking productivity have steadily improved over the last three years, inventory levels have skyrocketed. That’s one of the highlights of “DC Measures 2008,” a benchmarking report released at the Warehousing Education and Research Council’s annual conference last month.

Three years ago, the report says, companies reported holding an average of 20 days of raw materials in inventory. Now they’re reporting 62 days worth.

Kate Vitasek, managing partner at Supply Chain Visions and co-author of the report, says stagnation in the U.S. economy is part of the reason inventories are so high right now. But that’s certainly not the whole story.

Inventory levels have been on the rise for the past decade, she says, because U.S. companies have changed the way they do business. They offer more choice and faster service, and their supply chains are more complicated.

The biggest factor complicating supply chains, she says, is increased sourcing from overseas. (According to the American Assoc. of Port Authorities, container traffic at U.S. ports has increased 72% over the last decade.)

Importing materials, Vitasek says, automatically adds at least 30 days of inventory because of product being held in inventory as it crosses the ocean. In addition, companies sourcing from overseas usually hold more safety stock in response to their longer lead times.
Supply chain consultant Rosalyn Wilson agrees overseas sourcing has added extra time and uncertainty to companies’ supply chains, and that has pushed inventories up. “But that doesn’t mean we’re doing something wrong,” she says. “It just means we’re doing it differently.”
“What’s happening is making sense,” she adds, “and I don’t see any way of getting around it as long as we continue to globalize.”

But there is, of course, room for improvement.

Experts agree one way to improve inventories is to shorten the supply chain by selectively moving some production closer to home.

“In the rush for off-shoring, it’s possible that some products went out that shouldn’t have been off-shored to begin with,” says Mike Peters, first vice president at ProLogis. “And it’s possible that they’ll come back—maybe not to the U.S., but perhaps to Mexico.”

Another way to improve inventories is to leverage today’s sophisticated inventory planning tools. A recent report from Marsh, a consulting firm specializing in risk management, says companies using multi-echelon planning software to manage inventory on a global level commonly see inventory reductions between 10 and 20%.

“The new tools out there are really good,” says Vitasek. In fact, she says, the tools are so sophisticated that many planners don’t understand them. This lack of understanding leads them to mistrust the tools and override their calculations. “The tools are out there,” she says. “We just need to trust the tools.”

There is a lot of talk out there about companies redesigning the supply chain.

Rising transportation costs have hit home, people are starting to wonder if there are better ways to do things. A lot of what I have seen is from supply chain modeling software companies offering ways to compute more efficient methods of getting things from the point of production to the point of consumption (and back).

Most of what I have seen are disguised advertisements for these software companies, but they do bring up some valid points:

1. Rising fuel costs eat at the bottom line, you cannot simply have existing centers carry more capacity anymore.

2. Mergers and acquisitions are common when the economy is in a recession. This results in overlapping or excess warehouses, redundant supply chains.

3. Customer demands are changing (again) and what worked in the past may not be relevant as people are more concerned with costs than in the past.

4. Cost of relocation, employment, financing all need to be detailed when making these complex and weighty decisions.

I am not sure if you need to pay some professional $30 - $50 thousand to tell you that things need to change, and what they are. People have a pretty good gut feeling.

And while an exact optimal location decision is worth paying for, these models are only as good as the assumptions that go into them, so you can have a fancy multi-regression, Gauss optimization algorithm with all the bells and whistles, but at the end of the day, it is still a guess.

Online Realty: Breaking the NAR Monopoly

From Market Watch:

Online realty
DOJ: Realtors must allow online brokers to compete with traditional ones

By Amy Hoak, MarketWatch
Last update: 7:00 p.m. EDT May 27, 2008

CHICAGO (MarketWatch) -- Internet-based real-estate brokers praised a proposed settlement between the U.S. Department of Justice and the National Association of Realtors, saying that it will allow them to more fully compete with traditional brokers.

The proposed settlement, announced on Tuesday, stems from a 2005 antitrust lawsuit against the real-estate trade group, according to a DOJ news release. NAR policies challenged in the lawsuit were believed to prevent consumers from receiving the full benefits of competition provided by the online newcomers. They also discouraged discounting, the release said.

The case was scheduled to go to trial in July.
Specifically, the lawsuit challenged some of the group's rules on how traditional brokers were permitted to interact with a new breed of broker based online.

These online brokers allow their customers to access listings via password-protected sites instead of requiring a broker to facilitate their searches, according to the release. The Virtual Office Web sites or VOWs, often increased the productivity of brokers affiliated with the systems, which translated to lower commission rates for sellers and rebates for buyers.
ZipRealty, for example, gives its buyers a 20% rebate. In New Jersey, where rebates aren't allowed, a 20% donation is given to the United Way, said Pat Lashinsky, CEO of Zip.

Prior to the lawsuit's filing, multiple listing services permitted traditional brokers to withhold their listings from VOWs (a policy suspended during the investigation). NAR didn't, however, permit brokers to withhold listings from a traditional broker member of an MLS.

"Traditional brokers could essentially handicap the new model," said Guy Wolcott, co-founder of online broker Sawbuck Realty; online competitors didn't have all the listings.

Another rule that the DOJ took issue with: One that prevented a broker from educating consumers about homes for sale through a VOW, then referring those customers to other brokers, for a fee, to complete the deal.

"Some of the VOWs that focused on referrals also passed along savings to consumers as a result of increased efficiencies," the DOJ said in a news release. "Collectively, NAR's policies prevented consumers from receiving the full benefits of competition in the residential real estate industry."
If approved by the U.S. District Court in Chicago, the proposed 10-year settlement would require the association to change the policies and resolve the competitive concerns. NAR also will enact a new policy to guarantee Internet-based brokerages won't be treated differently.
In a news release, NAR pointed out that it is not required to make payments or admit any liability or wrongdoing in connection with the settlement.

Richard F. Gaylord, president of the National Association of Realtors, called the settlement a win-win for the industry and consumers.

"Competition is alive and well in the real estate industry. In fact, the competitive nature of our industry is even more apparent in times of market turmoil like those we are currently experiencing," Gaylord said in a news release.

"The DOJ implicitly acknowledges the value brought to the real estate market by the more than 800 MLSs across the country to make buying and selling a home easier. The MLSs are healthy, solid and sound, and will continue to deliver benefits to members and consumers."
Indeed, those listings are important for virtual offices to function.

"Internet entrepreneurs have been thirsty for this MLS data for at least a decade," said Glenn Kelman, CEO of Redfin, another online realty firm. "For a long time, the conventional wisdom in Silicon Valley was that you didn't want to take data from the Realtors because they didn't want to share it with you."

Amy Hoak is a MarketWatch reporter based in Chicago.

One element of commercial real estate is that we try to differentiate ourselves from residential real estate. We like to think of ourselves as more professional. Since the product we are selling is different, we are different, our methods are different.

I feel there is a stigma in the commercial real estate world against residential agents. They are viewed as the stay at home moms, the "get-rich-quick" crowd, people who treat houses like "Amway" products.

Maybe this is the by-product of the booming housing market, when anybody could sell a house and everybody did. Maybe that is where the stigma came from and now that the housing orgy is over, all the charlatans and hucksters associated with it are gone too.

The point is, there isn't a terrible difference between residential and commercial agents. They are all sales people, only the commercial agents deal more with the bottom line than with school districts.

Which is why this little bit scares me a little. Part of the reason why I have a job is that this information on lease rates and vacancy numbers is difficult to keep track of. Brokers make money because they are the gate-keepers; consumers are purchasing their knowledge, their sales skills, their experience.

If the information is freely available, then it reduces some of the barriers to entry. A point I mentioned in a previous article.

Insurance premiums decreased once people had access to the information, there isn't much difference in life coverage between companies, only the information on rates was difficult to obtain. Once these transaction costs (the confusion about various plans, terms and conditions) were eliminated.

The same could happen to real estate brokerage as well. Once the information monopoly is broken, the old status quo will be threatened.

The bottom line is: Will I be paid less?

If anything, with more information floating around there, analysis and interpretation becomes more and more important. I become the commodity then, rather than just the support staff.

One can dream can't they?

First Quarter 2008 Los Angeles Basin Industrial Report

Net Absorption Rebounds In First Quarter,
Construction Activity Continues To Slow




Positive net absorption (+1.3 Million SF) in the Los Angeles Basin for the first quarter of this year was due to a handful of very large deals in the East Inland Empire (Whirlpool’s 1.6 million SF lease in Perris, United Foods 613,200 SF lease in Moreno Valley and Kohler’s 480,300 SF lease in San Bernardino). These large transactions were enough to compensate for negative net absorption that occurred in other markets.



Construction activity continued to slow in the first quarter, only 16.7 million SF of industrial space was underway at the beginning of the year. This is down from 19.8 million SF under construction during the previous quarter and down significantly from 31.2 million SF under construction from this same time last year. The vast majority of the construction activity underway continues to occur in the Inland Empire, the last developable region of the Los Angeles Basin.


Here is the full report.




The Los Angeles Basin Industrial Report combines all the industrial reports to give a complete overview for the region.

For the region, things are fine. There is pain in most individual markets however, but several large deals in the East Inland Empire kept net absorption positive, for this quarter at least. I expect negative absorption for next quarter though, and for vacancy to rise and for asking lease rates to drop.

This is based on what I have seen so far, but I have been wrong in the past. I was expecting the worst to happen this last quarter, but a few outliers (3.2 million SF of outliers this quarter) kept the region in the black.

Statistics and averages do not matter much when the universe is built around extremes, as is the case with the large buildings I track. These buildings are usually either 100% full or 100% empty.

A 4.4% vacancy rate for the region does not provide landlords with vacant buildings much useful advice; for them the vacancy rate might was well be 100%.

Invisible Hands at Work

The National Geographic Channel is doing a series on the Ports of Los Angeles / Long Beach.

I plan on watching the series when it makes it's way to Netflix (I don't have cable), but I have been following it periodically on their website. I though I would share this little bit with y'all.

Half Way Around The World In A Sneaker

Molly Mayock
-Series Producer

The top products arriving at the Port of Los Angeles are:

(1) furniture;

(2) apparel;

(3) vehicle and vehicle parts;

(4) toys and sporting goods;

(5) electronic products.

The majority of these products are manufactured at factories in China. That’s why we decided to go to the Nike factory in Gaobu and follow a sneaker coming off the assembly line on its journey to the store shelf in the United States.

Going to China was the trip of a lifetime. We flew into Hong Kong, traveled on a train to the bustling city of Guangzhou in mainland China and then motored a few hours to the factory in a rural area. (I was pleasantly surprised when every area I visited carried the National Geographic Channel!)

After being loaded into a cargo container, the sneaker was trucked to the Port of Hong Kong, which is one of the busiest ports in the world. It’s a vibrant, wild place full of colorful characters. We met a 50-ish woman who’d been working on the same water taxi at the port since she was 12. She drove our camera crew right along side a massive cargo ship as it was being loaded with sneakers from the Nike factory.

Watching a sneaker being made was utterly fascinating—at least 200 hands are involved in making each pair. Most of the workers were teenage girls wearing fashionable western-styled clothing (probably made in China). The factory itself was bigger, brighter and more modern than I had imagined it would be. Except for the bathroom facilities–which consisted of a hole in the floor.

I was hesitant until I remembered an appropriate slogan: Just Do It.

Those sneakers will see more miles inside of that box than outside of it.

I am fascinated by the whole supply chain, the army of people making and distributing products whose work largely goes unnoticed. Such elaborate systems are virtually unknown in history; for the majority of the existence of the human race, goods were largely consumed where they were produced.

One of the basic tenants of economics is that trade makes everyone better off - since trade is voluntary, people would not engage in trade that makes them worse off. At this point in time, trade is at the highest level it has ever been, production is at its highest level, consumption is at its highest level, so this should, theoretically speaking, be the best time in the history of the world.

On a side note, there is a very good chance that those sneakers which are made in China, will be stored in one of "my" warehouses in the Inland Empire. The rent and vacancy numbers than I chart and track were probably used in deciding where to locate the warehouse and how much Nike should pay for it. Indirectly, I am a very small part of this colossal shoe assembly line; a river of shoes that started as a collection of streams, created from snow from places unseen.

Biodiesel boom is fueling thefts

Biodiesel boom is fueling thefts

CRIME: As oil prices rise, grease haulers find what once was trash is now treasure.
By Garance Burke, The Associated Press
Article Launched: 05/20/2008 10:48:12 PM PDT

A few years ago, drums of used french fry grease were only of interest to a small network of underground biofuel brewers, who would use the slimy oil to power their souped-up antique Mercedes.

Now, restaurants from Berkeley to Sedgwick, Kan. are reporting thefts of old cooking oil worth thousands of dollars by rustlers who are refining it into barrels of biofuel in backyard stills.
"It's like a war zone going on right now over grease," said David Levenson, who owns a grease hauling business in San Francisco's Mission District. "We're seeing more and more people stealing grease because it lets them stay away from the pump, but it's hurting our bottom line."
Levenson, who converted the engine in his '83 Mercedes to run on straight canola oil, has built up contracts to collect the liquid leftovers from 400 restaurants in the last two years.
Last week when his pump truck arrived at Thee Parkside, a dive bar known for its chili-cheese fries, his driver found someone had already helped himself to their barrel of yellow oil.
Grease is transformed into fuel through a chemical process called transesterification, which removes glycerine and adds methanol to the oil, leaving a thinner product that can power a diesel engine. Biodiesel can also be blended with petroleum diesel, and blends of the alternative fuel are now sold at 1,400 gas stations across the country.

But as the price of diesel shoots up, so, too, does the value of grease.

In the last three years, the price of soybean oil - the main feedstock for biodiesel made in the United States - has tripled. Last week, a gallon of crude soybean oil fetched 66 cents on the open market, according to the National Biodiesel Board.

Those kinds of numbers have encouraged biofuel enthusiasts to plunder restaurants' greasy waste, and have even spurred the city of San Francisco to get into the grease-trap cleaning business.

"Restaurants and staff are no longer looking at this material as trash, they're looking at is as something that's about to go into city vehicles," said Karri Ving, who runs the city's new waste cooking oil collection program. "Unless you lock down every trash can, thefts are going to happen."

Drivers for Blue Sky Bio-Fuels, a grease hauler that also manufactures biodiesel for San Francisco's municipal program, often find the 300-gallon dumpster they store outside the Oakland Coliseum nearly dry, despite the dozens of concessions stands that regularly dump their oil there. Losses at that one site alone have cost the company $3,700 in oil revenues in the last year, said Wesley Caddell, the Oakland firm's business developer.

Here are some facts about Biodiesel

Can I use Biodiesel in my vehicle?

Biodiesel can be used in any Diesel engine with no modification required, unless you have rubber fuel lines. If your vehicle was made from about 1995 on, you are pretty safe. Newer vehicles in the 2000s have synthetic fuel lines and are totally safe as far as I have read. The problems with older vehicles are that Biodiesel can attack rubber fuel lines over time cause leaking, etc. Another concern it that it can clean fuel lines and tanks so much that it can lead to clogging of fuel filters, etc. To be sure, CHECK YOUR FUEL LINES. If they are rubber, replace them with a synthetic line and you'll be fine. You should also check your owners' manual to be sure they don't recommend Not using Biodiesel. If in doubt, a blend of b20 (20% Biodiesel) is considered safe for most any vehicle.

Biodiesel is a legally registered fuel and fuel additive with the U.S. Environmental Protection Agency (EPA).

Will I get the same or different MPG with Biodiesel?

You will get the basically the same MPG as with Petro Diesel.

What are the drawbacks?

Solvency - Biodiesel has a solvent effect that may release deposits accumulated on tank walls or pipes from previous diesel fuel storage and precautions should be taken when first switching over to Biodiesel. This rarely happens, and mostly happens to very high mileage vehicles with over about 80,000 miles. This solvency can lead to Filter plugging. Read below.

Filter Plugging - Biodiesel has some solvent properties and will act as a solvent in the fuel. Blends greater than B20 may have enough of a solvent effect to break down the varnish deposits on the walls of the existing fuel storage tanks or fuel systems. The break-down of these varnish deposits will contaminate the fuel with particulate, which can cause fuel filters to plug rapidly. Once the contaminant is removed from the fuel, subsequent fuel filter service intervals should return to normal. Biodiesel blends up to B20 should have minimal solvent effects on existing fuel systems and blends below B5 should have no solvent effect above that of regular diesel fuel meeting ASTM D 975 specification. Blends of B5 and below should also meet the ASTM D 975 specifications for diesel fuel. Filter plugging problems can be prevented by effectively cleaning storage tanks before introducing biodiesel. Filter plugging can also be minimized by using low blends of biodiesel and/or ensuring the biodiesel that you are using is from a quality source meeting the ASTM D 6751 specifications. BQ9000 is a quality certification that certifies biodiesel suppliers that provide quality biodiesel meeting the ASTM D 6751 specification

Cold weather - Biodiesel will generally start to gel at higher temperatures than #2 diesel fuel which can be a problem if you are running B100. But a simple fix is to run B50 or less. You can run B50 in some pretty cold climates without worry. Our Book (included with all processors) explains this in detail, along with methods to improve the cold weather performance of Biodiesel.

Nitrogen Emissions - NOx - Fueling with Biodiesel that is not additized does tend to increase emissions of oxides of nitrogen commonly known as NOx. This increase can be anywhere from 1% - 15% depending on the engine type and blend of Biodiesel used.
But, NOx emissions can be reduced using additives at a rate anywhere from 5% to 30% depending on the additive and feedstock used to produce the Biodiesel.

Maybe this ethanol bubble has some legs to it after all.
66 cents a gallon for soybean crude equals $27 a barrell.
A barrel of crude oil sells for $130.

Hat tip to my fellow Colliers researcher, Michael Soto.

Jevic Calls It Quits

From Logistics Management:

Jevic puts the brakes on operations
LTL carrier cites market conditions as driver for suspending business
Jeff Berman, Group News Editor -- Logistics Management, 5/19/2008

DELANCO, N.J.—Due to various market conditions, Jevic Transportation Inc., a regional less-than-truckload (LTL) carrier providing services in the Northeast announced today it is discontinuing operations.

In a letter to customers, Jevic President and CEO David H. Gorman said “the current high fuel costs, economic downturn, increasing insurance costs, and tightening credit markets have made this decision necessary.” The letter also noted that Jevic will cease providing pickup service, effective today, but it will continue to deliver all freight within its system prior to closing.
With market conditions in the LTL sector remaining unsteady and capacity continuing to outstrip demand, this news did not catch anyone off-guard. In fact, one LTL executive who asked not to be named told LM this could be the beginning of a trend which sees more LTL operators put the brakes on business.

"It would not be surprising over the next several months to see other players leave the market," said the LTL executive. "Between poor demand, eroding pricing, and high fuel costs, the small-to-mid-sized carriers can't keep up, especially with shippers beating them up on pricing and fuel surcharge. Everyone's being squeezed."

This sentiment was shared by Satish Jindel, president of SJ Consulting Group Inc., a Pittsburgh-based transportation consulting firm, who said that this may be a glimpse into the future of the LTL industry. Jindel said that it is possible $1 billion worth of capacity may exit the LTL market between 2008 and 2009, with some of that capacity coming from midsize carriers like Jevic.
Jevic, Jindel explained was a “hybrid” company, with both LTL and light truckload services and no breakbulk services. Another company that previously attempted this model was G.O.D., but G.O.D. had trouble with service and a value proposition for shippers with this model, which weakened shippers supply chain needs.

“With the way market capacity has been greater than demand, companies of this kind will struggle because of the difficulties of customers to understand what the true value proposition is,” said Jindel. “Other companies with revenues in the $50-to$100 million revenue range are likely to experience these types of challenges in the next four-to-six quarters.”
Even though Jevic is existing the marketplace, Jindel said there are still several other options for shippers to consider when looking at LTL services. He also said this news will not affect market dynamics from a shippers’ point of view. Rather, from a shippers perspective, he said that if carriers are not able to cover their operating costs—especially fuel which continues to be unpredictable (diesel is currently at $4.552 per gallon and up more than 30 percent year over year, according to the Oil Price Information Service) and continues to increase—and if carriers are unable to recover fuel costs, it is inevitable the LTL industry will end up with fewer carriers.
And carriers without proper pricing that allow them to recover total costs and earn reasonable margins may face the same demise as Jevic, he said.

“Being aggressive on pricing where it affects your financial stability,” is a deadly approach to staying in business,” said Jindel.

Jason Seidl, an independent transportation analyst whom was previously at Credit Suisse, told Bloomberg that Jevic shutting down may be a “boost to other trucking companies,” because it provides them with the opportunity to raise rates. And like Jindel, Seidl expects more trucking companies to leave the market, which will help the out-of-balance supply/demand situation.”
In July 2006, Jevic was acquired by Sun Capital Partners, a private investment firm. The sale price was $40 million, plus $12 million in current income tax benefits, according to a report in The Philadelphia Inquirer. At the time of the sale, Jevic was an operating subsidiary of SCS Transportation Inc. The Bloomberg report added that both Jevic and LTL carrier Saia were spun off by YRC Worldwide Inc. in 2002 as SCS Transportation and SCS took the Saia name after selling Jevic.

Less Than Truckload (LTL) is a tough business.
Everybody who ships anything will eventually need less than a truckload of stuff. The LTL business is a matchmaking business where these odd trips are combined to minimize empty loads.
It is a risky business with many moving parts and the LTL's will charge accordingly. Shippers have to be aggressive on pricing, you cannot keep absorbing costs and hope to remain in business.
With rising fuel prices, things in the shipping world are going to be tough all over. Rising prices makes it difficult for shippers to set a "fair" price and it is hard for users to predict what their costs are going to be.
Inflation and inflation uncertainty creates a vicious feedback loop: expectations of inflation feed actual inflation which feed expectations of inflation.
It is hard for carriers to know what their actual costs are, the first to be hit will be the LTL's, since there are more variables, more unknowns, more risk, more ruin.

Everyone needs LTL's, and prices are sure to rise if what happened to Jevic is systemic to the industry.

Crude Awakening

A Barrel of Oil is 42 gallons (48 gallons including additives) which will make:

• 19.5 Gallons of Gasoline


• 9.2 Gallons of Distillate Fuel (Home Heating & Diesel Fuel)


• 4.1 Gallons of Kerosene & Jet Fuel


• 2.3 Gallons of Bunker Fuel


• 12.9 Gallons of Production Materials (Asphalt/ Road oil, Lubricants, other products)
  

In The Last 10 Year a Barrel of Crude Oil went from $14.86 in January of 1998 To $92.93 in January of 2008 (A 525% increase).

Oil now sells for $126 a Barrel.

The price of oil has impacts on where people choose to build as well as how energy will continue to be consumed. This has implications for commercial real estate as well.

Retail: Increases in oil dampens demand for goods and services. Consumer staples such as grocery stores, drug stores and discount retailers should weather the storm with relative ease. Declines in durable goods (appliances, furniture, and electronics) should be expected as well as projected declines in men’s clothing. Women’s clothing should see modest gains. Lifestyle centers and transit-oriented-development (TOD) are new trends we are seeing in retail.

Office: Increases in energy prices will alter the bottom line of landlords. Sudden spikes in heating, ventilation and air conditioning (HVAC) costs will hurt landlords with full-service gross (FSG) tenants since these higher rents include utilities and cannot be immediately passed-through to tenants. Also a greater number of tenants are seeking energy efficient, environment friendly buildings.

Industrial: Transportation costs are seriously hurting the bottom line for the transportation industry and everyone, from ocean carriers to railroads to trucking companies, are looking for ways to cope. To conserve fuel carriers are reducing travel speeds and seeking to minimize travel distances. Green distribution centers and green supply chains are gaining momentum as users realize the financial benefits of reducing energy consumption.

In February the House passed the “Renewable Energy and Energy Conservation Tax Act of 2008,” or H.R. 5351, which would restore taxes on oil companies in order to invest in renewable energy. The Act extends the “income and excise tax credits for biodiesel” through 2010. The bill is now before the Senate. President Bush vowed to veto the legislation if passed in the Senate.

This nation is built on cheap oil.

Railroads were the tools to wealth in the 1800's, and the automobile was the tool to wealth in the 1900's.

At the turn of the century, we have yet to find a suitable alternative to the automobile and our goods are delivered to us by truck.

Diesel engines move 94 percent of all freight in the United States, 95 percent of all transit buses and 95 percent of all heavy construction machinery.

Diesel fuel is pushing $5 a gallon, the highest it has ever been, even when adjusted for inflation.

It seems to me that the huge recent push in ethanol production, is a last ditch effort as we enter what most professionals predict is "peak oil", the point in which demand forever crushes supply, removing any ceiling that may have existed for prices.

Now, I don't want to alarm you. Economists have predicted the end of all humanity for quite some time now (*cough* Thomas Malthus) and we are all still here. Something usually happens that disproves all of our collective pessimism, only we just don't know what that thing will be.

If I happen to find it, I will patent it and then I will be sure to sell it to you in little chunks, at monopolistic prices. I am just not sure if ethanol will be it. My limited experience has been things like this usually come out of left field, there are too many vested interests and backdoor political maneuvering in the ethanol field to make it commercially viable.

Usually a government mandate is a poor way to innovate yourself out of a crisis, although it did seem to work wonders for the space program.

Introducing the "Staycation", Obviously not what the Bush administration had in mind when they sent you $600

From LA Times:

Basically people are choosing to stay home rather than to go on vacation. Gas prices, recession fears, consumers are cutting back on their consumption.

Bad news for retail and tourism. I guess we finally reached the point in which Americans are unwilling to spend what they don't have.

I have determined that you pose a security threat

From The New York Times:

Blunt Federal Letters Tell Students They’re Security Threats

By SCOTT SHANE
Published: May 13, 2008

WASHINGTON — A German graduate student in oceanography at M.I.T. applied to the Transportation Security Administration for a new ID card allowing him to work around ships and docks.

What the student, Wilken-Jon von Appen, received in return was a letter that not only turned him down but added an ominous warning from John M. Busch, a security administration official: “I have determined that you pose a security threat.”

Similar letters have gone to 5,000 applicants across the country who have at least initially been turned down for a Transportation Worker Identification Credential, an ID card meant to guard against acts of terrorism, agency officials said Monday.

The officials also said they were sorry about the language, which they may change in the future, but had no intention of withdrawing letters already sent.

“It’s an unfortunate choice of words in a bureaucratic letter,” said Ellen Howe, a security agency spokeswoman.

Ms. Howe and Maurine Fanguy, who oversees the new ID card program, said that most foreign students did not qualify for the identity cards, but that the letters were not intended to label the recipients as potential terrorists. (Some applicants are also turned down because of criminal records.)

Mr. von Appen, 23, one of at least four oceanography students at the Massachusetts Institute of Technology who received identical letters, said he was stunned by its language.

“I was pretty much speechless and quite intimidated,” said Mr. von Appen, whose research is supported by a $65,000-a-year grant from the National Science Foundation.

A British student at M.I.T. who was rejected, Sophie Clayton, 28, said that at first she was amused at what appeared to be a bureaucratic absurdity. But as she pondered the designation, Ms. Clayton said she grew worried. “The two words ‘security threat’ are now in the files next to my name, my photograph and my fingerprints,” she said.

Institute officials were also disturbed. The agency controls airport security, and “our students travel in and out of the country a lot,” said Danielle Guichard-Ashbrook, associate dean and director of the international student office at M.I.T.

And the agency is part of the Department of Homeland Security, which oversees immigration matters, including student visas.

Ms. Guichard-Ashbrook said the security agency should remove the misleading language from all files and issue new letters formally withdrawing the “threat” label.

But Ms. Howe, the agency spokeswoman, said that the letters were legal, if flawed, and that there were no plans to send replacements.

She said she did not believe the denial letters would cause students any problems with visa renewal or airport security checks. They will even be able to enter secure ports and ships for their work as long as they are accompanied by someone with the new ID, Ms. Howe said.
The Transportation Worker Identification Credential requirement is being phased in starting Oct. 15. The cards cost the applicant $132.50 and have been issued to 275,000 people so far of 1.2 million people expected to receive the credential, officials said.

The date the TWIC's were supposed to be enforced has been pushed back, from September 25th 2008 to April 15th 2009. Hopefully this will allow more workers to sign up or replacements to be found.

Coast Guard Site explaining it all.

2008 LAEDC International Trade Report

My fellow researcher Michael Soto went to this event and I quized him on the top five issues. They are:

• While needed, environmental, labor and security issues are slowing down much needed port expansion projects.
• Logistics education is a big problem, there are not enough qualified workers to replace the older and more experienced workers.
• Programs at being started at the high school level to train workers and get people interested in a career in logistics.
• Tighter labor security issues are decreasing the pool of available workers.
• Long term forecasts of container volume at the port is very difficult, since so many variables and contingencies are involved.
• 1/3rd of the goods that enter the port are for local consumption, the rest is exported to the rest of the country.

Here is a link to the PDF.

There is a lot of good information in this report, you can see the trade volume of various goods entering the port, which country the goods are coming from, employment growth etc.

Something a little troubling in the report:

With the shifting trends in international trade flows, such as the move to more
all-water service to the U.S. east coast, business leaders in the Riverside-San
Bernardino area are suffering a touch of angst about future development
potential.

Sad but true: We need that port.

Why Location is STILL important

YouTube Video of Richard Florida, author of "Who's Your City".




Synopsis:

It's a mantra of the age of globalization that where we live doesn't matter.

We can innovate just as easily from a ski chalet in Aspen or a beachhouse in Provence as in the office of a Silicon Valley startup.

According to Richard Florida in Who's Your City, this is wrong.

Globalization is not flattening the world; in fact, place is increasingly relevant to the global economy and our individual lives.

Where we live determines the jobs and careers we have access to, the people we meet, and the "mating markets" in which we participate.

And everything we think we know about cities and their economic roles is up for grabs.

Richard Florida is Professor of Business and Creativity at the Rotman School of Management, University of Toronto, and the founder of the Creative Class Group, a for-profit think tank that charts trends in business, communities, and lifestyles. His national bestseller The Rise of the Creative Class was awarded the Washington Monthly's Political Book Award and Harvard Business Review's Breakthrough Idea Award.

The World is NOT flat.

So my job still matters, since I have knowledge about the landscape of the world and the Inland Empire in particular.

Delinquencies In Commercial Mortgage Backed Securities Rise

From 0.34% last year to 0.43%, according to Standard & Poor.

Here is the article:

Interesting facts: Multi-Family properties had 55% of the delinquencies, and of that the regions hardest hit were Texas, Florida & Nevada.

Why these regions? Speculation during the housing bubble led to overbuilding. The people who bought these houses lived in California where they could borrow heavily against the value of their expensive Californian house. This money was then "invested" in cheap housing in Texas, Florida and Nevada in anticipation of selling these units at a higher price. Since the population to support these new homes was not present and since these "investors" were not willing to take a loss, they did the only logical thing which was to rent them out.

Only these people didn't realize that everybody who owned these newly built houses was doing the exact same thing.

As a consequence, asking rents dropped below that which was being charged by apartment units in Nevada, Florida and Texas. These apartment units were not able to attract tenants, reducing the cash flow of the apartment owners who are now late on their loans.

A tragically beautiful butterfly effect of rising home prices in California leading to apartment complex failures in Texas.

Economists have long feared the Law of Unintended Consequences, and part of the reason why there is so much uncertainty with regards to this housing bubble is that we will likely see grotesque and strange beings such as these appear. Financial monsters that were allowed to grow in hidden places and without any known natural predators.

Greed without fear.

Fear is back my friend. And it is back to crush without mercy the misguided vanity that took place in it's absence.

Multi-family housing in California is faring much better, people actually want to live here and single family houses are prohibitively expensive, so the fundamentals are solid.

I would hate to see delinquencies in multi-family financing in Texas negatively impact financing here where things are sane, but in these crazy times anything is possible.

The Bigger They Are: Maddux Fire Sale!

From Bloomberg:

May 11 (Bloomberg) -- A package of Los Angeles real estate on sale for 35 cents on the dollar is attracting investors to the depressed shares of Meruelo Maddux properties Inc., the biggest private landowner in the city's four-square-mile downtown.

The stock has plummeted 85 percent since an initial public offering 15 months ago as the global credit crisis threatens to disrupt refinancing of $200 million in mortgage debt coming due in the next 12 months, as well as completion of the city's tallest downtown residential tower.

Meruelo Maddux owns or controls 80 acres including the Little Tokyo Shopping Center, home of the country's largest Japanese supermarket, as well as warehouses and buildings used in Tom Cruise's action film ``Mission Impossible III.''

``It sure looks like a cheap way to play the downtown L.A. market,'' said Mike McGarr, a portfolio manager at $2.4 billion Becker Capital Management in Portland, Oregon, which has added shares this year and owns 1.55 million. ``You're not hanging your hat on a few properties. You've got about 50 properties in various states of development or redevelopment.''

Meruelo Maddux's market capitalization of $142 million is about a third of the book value of its properties minus debts. Loan payments and maintenance consume $500,000 a month more than the company takes in, eroding the developer's $13.5 million in cash.

This company owns a couple of large buildings in Barstow, as well as a large land stake in the region as well. My guess is that they would rather sell the entire portfolio rather than sell each property off individually.

There was talk about Maguire Properties looking for a buyer as well, since they were having some financing issues. Maguire is a major office landlord in the Los Angeles region.

Why is Land So Cheap In The Inland Empire? Maybe it is a lack of a "Zoning Tax"

Here is an interesting paper that compares construction costs with housing costs. The question is, why is there such a huge gap in some cities between the cost of constructing a home and the final price of the structure?

If we look at some coastal regions we see that property values are really high, because these are high-amenity areas. However, in looking at the data there are plenty of developable sites around these high-cost regions that could be developed, and if houses were developed on these parcels than the prices of homes should decrease and the gap between the construction cost and the final value of the home should decrease.

However, there are barriers to building in these areas imposed by local governments, the so called "zoning tax" that includes all the costs of increased government regulation into the housing construction costs. In principal the gap between the construction costs and the final product costs includes the cost of land, plus the "zoning tax".

If we work backwards, areas that have few zoning requirements will have cheaper buildings because is it easier to build in these areas. (*cough* Inland Empire). The opposite of the "zoning tax" would be basically to offer incentives by local governments to get job creating developments into their regions (*cough* High Desert).

The paper includes some interesting statistical tools to tease out the extent of the "zoning tax" along with some other government regulation observations.

Hat Tip to my fellow Colliers researcher, Mr. Soto.

Green Logistics: Easier Than You Think

From Logistics Management:

Green logistics: Con-way Truckload turns back speed governors

Jeff Berman, Group News Editor -- Logistics Management, 5/8/2008

JOPLIN, Mo.—As part of a company-wide sustainability initiative, Con-way Inc. subsidiary Con-way Truckload announced it has turned back speed governors on its 2,700-tractor fleet from 70 to 65 miles per hour.
This news follows a March announcement made by Con-way Freight, Con-way’s less-than-truckload (LTL) unit, when the company said it turned back the speed governors on its 8,400-tractor fleet from 65 to 62 miles per hour.
Con-way said that lowering its maximum highway speed has the potential to save the company 2.8 million tons of diesel fuel per year and reduce annual carbon dioxide emissions by roughly 62 million pounds. It added that this savings represents the equivalent of removing 6,300 passenger cars from U.S. highways.
Con-way Director of Corporate Communications Gary Frantz told LM that fuel conservation and reduction of carbon footprint are the main drivers for this endeavor.
“This is the single most [significant] operational change we can make that will reduce carbon emissions from the fleet,” said Frantz. “It's in line with our overall corporate sustainability initiative.”
He noted that Con-way Truckload started this process in January. And given the nature of the operation, with trucks out on the road weeks at a time, he explained that it took several months for the company to cycle tractors back into its maintenance facilities to make the change to the trucks.
Con-way Truckload completed the speed governor change for all 2,700 trucks in its fleet on April 30. Frantz commented that Con-way Freight was able to make the change in this fleet quicker, because their trucks come back to a service center daily.
And at a time when reducing carbon footprints and fuel conservation are becoming more and more important, Frantz said that reducing truck speed is vital for shippers—as well as something that shippers are requesting.
“Leveraging a transportation partner that is actively taking steps to reduce its carbon footprint and conserve fuel [is key for shippers],” said Frantz. “We are part of their supply chain; the services we provide in moving their goods contribute to their carbon footprint. Where we can take steps that reduce our carbon footprint, our customers can apply that to carbon footprint calculations of their supply chain as well, for their goods which we move on their behalf. Also, fuel is the biggest component of operating costs for Truckload carriers. Where we can reduce and more effectively manager this cost it helps improve the financial stability and viability of the carrier. That's a plus for the shipper as well.”
While Frantz disclosed that this endeavor will help Con-way Truckload better manage its fuel costs by improving fuel economy by about three-tenths of a mile per gallon, he could not say that it will have an impact on its overall rate base, given the extraordinary and unprecedented rise in fuel prices.
“In most cases with customers rates are negotiated at a specific level and include a particular ‘ceiling’ for price of fuel,” said Frantz. “When fuel prices exceed that ceiling a fuel surcharge kicks in. Carriers cannot absorb these escalating fuel costs.”

Green is good for your bottom line: Driving slower saves fuel, saving fuel prevents pollution and saves money. If only there was leadership that would reduce the speed limit to 55 MPH like the previous energy crisis.

Con-way owns a 76,400 SF building at 13364 Marlay in Fontana.

You know it is bad when businesses start going to Payday Loan Centers

From BusinessWeek:

When Small Biz Can't Get a Loan
With lending tight, more entrepreneurs are turning to controversial "merchant cash advances"

While most financial-services firms are floundering, those that specialize in so-called merchant cash advances are thriving. That's a mixed blessing for entrepreneurs who increasingly are turning to these sources for quick cash: Their money can come with a high price tag.
Like regular lenders, merchant cash firms dole out a lump sum. But rather than requiring that borrowers make a fixed payment at a specific interest rate, these companies collect a piece of a merchant's total credit-card sales each month—via the credit-card processing service—until they recoup the total amount plus a premium.
Merchant cash advances have been around for roughly a decade. But with big banks in full retreat from lending, more small business owners are seeking help from the likes of AdvanceMe, AmeriMerchant, and hundreds of other companies and independent contractors that offer such advances. The size of the industry jumped 50% in 2007, to around $700 million.

You can read the entire article for more information. Basically it comes down to businesses not able to get funds the old fashioned way - lower interest bank loans - and are turning to the equivalent of a loan shark.

Running a business on borrowed funds is one thing but running an unsuccessful business on borrowed funds is another. These "merchant cash advances" charge really high interest (35% APR in some cases) because of higher default rates, but it may be better to take a long hard look and then throw in the towel.
Not everyone will be winners and in a down market the losers will be crushed with a cruel efficiency and those that remain will become stronger. These artificial finance lifelines will leverage a bad or ill timed business, creating a spectacular failure from what would otherwise be a mediocre unsuccessful business.

Dallas Fed Chairman Sums It Up Nicely

Read this: and tell me you don't feel a little bit reassured that it is all going to be OK.

Richard Fischer, Dallas Fed President, covers these topics in this well written paper;

Problems with the Financial Markets - lending to non-prime borrowers and selling these loans on the open market.

The Flash Point - The "Minsky Moment" when the pendulum begun to swing the other way.

Spreading Troubles - Losses at banks abroad reduced the market for American debt.

Monitoring Lapses - The chain of command that allowed regulators to miss what was going on

The Fed's Response - New tools the Fed has used to deal with the problem

Fed's Goals - not to bail out speculators

These were my favorites:

Historical Perspective: Texas in the 1980's

On Booms and Busts: Perfectly natural

On The Nature Of Risk: Eliminating risk is more costly than learning to control it

Summary of The Missippi Real Estate Bubble of 1819

Difference Between Japan and American in Regards to Property Busts.

Another Colliers Real Estate Blog - Capital Markets Team

Private Capital Advisors (PCA) started a blog recently and now takes the prestigious prime slot on my link list. They work primarily in the multi-family sector with apartment investors.

The multi-family sector is projected to actually offer better returns for investors in comparison with other property types (retail, office and industrial) because homeowners are switching to renting since home sales are down (in case you haven't heard).

But don't take my word for it, the National Association Of Realtors (NAR) says this about the Multi-Family sector:

The apartment rental market – multifamily housing – is experiencing increased
demand from the slowdown in home sales. With a rising population and a
growing number of households, vacancies are tightening and rents are rising.

In regards to commercial property and the business cycle, it seems to me that the first segment to get during an economic contraction would be retail: people cut back on discretionary spending when times get tough. This leads to less retail demand and the wave of retail vacancies we are seeing now. In addition to the number of retail chains filing for bankruptcy, (Wicks, Linens' n Things, Comps USA, Movie Gallery) a very large number are closing stores (Ann Taylor, Foot Locker, Zale, Sprint Nextel) since they over-expanded when the times were good.

Next, there should be a little blip in industrial. There is a lag time between when goods are produced and when they arrive at the stores. It usually takes awhile for manufactures to become aware of the decrease in demand and goods should start piling up. This means more warehouse space to house these goods. Eventually, manufactures will cut back, companies will go out of business, the warehouses will empty themselves and less industrial space will be demanded. Recent developments in industrial technology have reduced this lag time; just-in-time delivery means less warehouse space.

Office is a little tricky, depending on what spurned the downturn. In this instance it is housing and finance, so we should see reductions in finance, insurance and real estate (FIRE) companies, and fewer expansions and more sublease space in the office market.

Usually what occurs in a business contraction is a huge increase in borrowing costs (the interest rate) as fewer businesses are making money, lenders raise the rates to protect themselves from defaults. This affects homeowners too, so fewer people are buying houses since they cannot get the funding, the so called "credit-crunch".

At the same time, the population is still rising, people are still moving from place to place, fewer homes are being built because home builders cannot get the financing and few buyers can afford the borrowing costs. People substitute out of housing and into apartments.

Thus, the multi-family sector is almost counter-cyclical; they potentially could do more business when times are lean. Again the only problem is going to be the financing. Private capital would be the way to go on that one - when money is scarce, those who have money will have the opportunity to make a lot of it if they place their bets right. Now is a good time to buy if you are in it for the long haul (and you are loaded).

Current Economic Conditons - Beige Book

Some interesting points from the Federal Reserve's Beige Book on general economic conditions. We are in the 12th District, headquarted in San Fransisco, so this section of the report is for our region.



Twelfth District--San Francisco
Economic activity in the Twelfth District appears to have been largely flat on net during the survey period of March through the beginning of April. Upward pressures on labor costs continued to moderate in some sectors, while upward price pressures were subdued for most products but remained strong for food and energy-intensive items. Retail sales weakened further and demand growth for services continued to slow. Manufacturing activity was mixed across sectors but appeared to hold steady on net, while agricultural producers saw solid growth in sales. Demand for residential real estate remained exceptionally weak, and demand for commercial real estate softened a bit in some areas. Banking contacts reported that loan demand was largely unchanged or fell slightly on net and credit standards tightened further.


Wages and Prices

Price inflation was modest overall, but upward pressures remained strong for food and energy products. Final prices were stable or down for most retail items, and prices fell further for selected building materials, especially wood products. By contrast, high prices for energy-related inputs and some raw materials, such as steel and resin, created upward pressures on final prices for transportation services and assorted categories of manufactured and agricultural products. Prices for various agricultural commodities and food continued to rise rapidly.
Wage pressures were modest in general, with contacts noting only small increases in overall labor costs. Upward wage pressures moderated further in sectors that have seen reduced labor demand in recent months, such as construction, retail, finance, and real estate. However, wage increases remained rapid for engineers and other highly skilled technical workers in selected manufacturing industries, such as aerospace, and in computer and software services.


Retail Trade and Services

Retail sales continued to soften. The pace of sales slowed at department stores and for a variety of smaller retail chains, causing inventories to rise further above desired levels and some retailers to cancel orders for new goods. Discount chains reportedly performed better than traditional department stores, although one contact pointed to a surprising degree of strength for luxury goods. The volume of gasoline sales was reported to be down significantly compared with 12 months earlier. Sales of new automobiles and light trucks were very slow for both imported and domestic makes, and demand for used vehicles weakened significantly, with one report pointing to a "collapse" in March.
Demand growth for service providers eased overall. Growth continued at a moderate pace for providers of health-care services. However, for providers of real estate services, such as title insurance, activity remained at very low levels and contacts reported significant contractions in employment. Demand for advertising has been on a downward trend, and contacts in software services reported that sales slowed as businesses scaled back their spending on information technology equipment. Travel and tourism activity rebounded a bit in Hawaii, with gains in visitor counts and spending evident relative to 12 months earlier. By contrast, in Southern California, hotel bookings for the spring and summer have been running significantly below their levels from last year, and in Nevada casino revenues recently recorded their slowest growth rate in four years.


Manufacturing

District manufacturing activity was mixed across sectors but appeared to hold steady on net during the survey period of March through the beginning of April. Production activity and new orders remained strong for makers of commercial aircraft and aerospace products used for national defense. Semiconductor manufacturers reported moderate growth in revenues accompanied by balanced inventories and high rates of capacity utilization, with solid growth in unit sales propelled in part by robust overseas demand. Demand growth for food manufacturers reportedly ranged from moderate to strong. By contrast, lumber mills continued to curtail production and shed jobs in the Pacific Northwest, and demand remained weak for District apparel makers.


Agriculture and Resource-related Industries

Demand and sales grew further for agricultural products. Solid growth in domestic and overseas sales pushed revenues higher for a variety of tree and row crops and also for livestock, although these gains were partly offset by cost increases arising from higher prices for grain, fertilizer, and petroleum-based inputs in general. Contacts in Southern California reported concern over pending cuts in water deliveries caused by a prolonged drought in the Colorado River Basin, which may curtail spring plantings.


Real Estate and Construction

Conditions in District housing markets remained exceptionally weak during the survey period, while demand for nonresidential real estate eased a bit further. Demand for new and existing homes was very weak, and contacts reported rising foreclosure rates in parts of California, Nevada, and Arizona. Prices continued to fall noticeably in the weakest areas, and they have flattened or begun to fall in other areas that had shown resilience well into 2007, such as Utah and parts of the Pacific Northwest. On the nonresidential side, activity slowed a bit further. Contacts reported reduced demand and lower prices for commercial properties in the San Francisco Bay Area, further increases in commercial vacancy rates in Las Vegas, and sluggish nonresidential construction activity in the San Diego area.


Financial Institutions

Reports from District banking contacts suggest that lending activity was largely flat or fell slightly relative to the previous survey period. Reports on commercial and industrial lending were mixed, with little change reported in some areas and declines reported in others, suggesting a slight decline on net. Refinancing activity for home mortgages picked up a bit further, but demand for new mortgages remained at very low levels. Lending standards remained quite restrictive for residential mortgages and construction loans and they tightened a bit further for consumer and business borrowers in general.

High Desert Loses Out on $150 Million Funding for Corridor

From the California Real Estate Journal.



MAY 5, 2008
High Desert Loses Out on $150 Million Funding for Corridor
By KARI HAMANAKA CREJ Staff Writer



The difficulty the Victor Valley has faced in gaining approval for state transportation funds is no different from the challenges faced by any other city or agency applying for a slice of Proposition 1B funding.

With the consensus that the High Desert will shoulder the next wave of industrial development, however, the California Transportation Commission's denial of $150 million in funding for the E-220/High Desert Corridor project is yet another hurdle the region must face.

"Certainly our county is growing, and we have an extensive list of transportation improvements that cover highway and rail," said Deborah Barmack, executive director of the San Bernardino Associated Governments, the agency responsible for regional planning and allocating funds from the county's Measure I half-cent transportation sales tax. "Unfortunately, transportation funding is diminishing along with the economy so our strategy is to develop a shelf of projects that are going through the environmental and design process so that as funding becomes available, we'll be ready for construction."

If built, the High Desert Corridor project would provide a valuable east-west connection between Palmdale and the Victor Valley, taking more trucks off surface streets and other freeways or highways such as the Cajon Pass.

It would begin at State Route 14 in Palmdale and run to Interstate 15 in Victorville. Phase 1A of the project would add 4.75 miles of a four-lane freeway from Interstate 15 to the Southern California Logistics Airport in Victorville.

"We're facing our capacity constraints along all modes, so we have tremendous volume in terms of goods movement and we haven't built up to capacity in decades," said Fran Inman, a member of the National Association of Office and Industrial Properties Southern California and senior vice president at Majestic Realty in Los Angeles. "So, what we really need to do is invest in infrastructure on the rail side and highway side."

A recent report from the Los Angeles County Economic Development Corp. and the Jack Kyser Center for Economic Research that looks at Southern California business expansion activity last year supports what Inman and others are saying about the need to invest in infrastructure. According to the report, the Riverside-San Bernardino industrial market ranked high with a 4.8 percent vacancy rate in fourth-quarter 2007.

Based on when funding comes through, it is estimated that the section of the High Desert Corridor running east of Route 395 could be completed as early as 2017, while the area west of Route 395 is expected to be built out over an 18-year period.



Barriers to Funding

In January, SANBAG filed applications on behalf of the city of Victorville, the lead agency for the High Desert Corridor project, along with a number of other goods movement-related infrastructure projects to the California Transportation Commission.

However, the application ultimately was rejected based on several problems the California Transportation Commission had with SANBAG's application.

According to commissioners' comments printed in a report on all the nominations requesting funding, the submission was incomplete and called the "scope of work unclear." At the same time, commissioners also questioned the air quality analysis and lack of a business plan and concluded the report by asking, "What is Route E-220?"

While the total project cost will not be estimated until a contractor is selected, the Southern California Association of Governments estimates the full cost to be $6.9 billion in 30-year escalated dollars. The cost of Phase 1A alone is $400 million.

"SANBAG did provide all of the information requested by the CTC," Barmack said. "Similar questions were asked on a variety of projects, some of which were funded and some of which weren't. We feel that we answered those questions and certainly if it appears that funding can be placed for the High Desert Corridor, we'll be engaged in that conversation with commission staff."

One of the greatest barriers to receiving funding was the E-220 project's status as a tier-two project.

SANBAG and a group of transportation-related entities from throughout Southern California determined priority levels based on several factors, including a required construction delivery date of 2013 and the availability of matching funds.

"We're hopeful that there will be a new category of funding identified for goods movement, and it would certainly be primed for that kind of funding," Barmack said. "There are some local transportation tax funds that may contribute to funding for this project and part of this project is slated for public-private partnership."

The public-private partnership Barmack referred to would be the Joint Powers Authority led by Chairman and San Bernardino County First District Supervisor Brad Mitzelfelt.

The JPA filed a Request for Proposal in December and received proposals in March from Jacobs Carter Burgess and Tetra Tech, said Mitzelfelt's Communications Director David Zook.

According to Zook, a contract may be awarded as early as May 23. He also said the JPA will continue applying for future rounds of transportation funding for the High Desert Corridor.



Playing Infrastructure Catch-Up

Among the projects that did receive approval for funding was reconstruction of the Devore interchange, new interchanges on Interstate 10 in Rialto and Fontana, and grade separations in the valley portion of San Bernardino County and in Barstow.

"In the Victor Valley area, priorities are the interchanges along Interstate 15 at Ranchero and Nisqualli and La Mesa and the Yucca Loma River Crossing," Barmack said.

The $60 million La Mesa/Nisqualli interchange over Interstate 15 was put on hold in March after SANBAG removed the project from being nominated for State Transportation Improvement Program funds because the city of Victorville was unable to show that it was fully funded.

Developer mitigation fees would have been required to pay for half of the project. SANBAG originally proposed $14.4 million in state funding for the interchange, but the city of Victorville would have had to commit $15.6 million to be paid back by SANBAG with future Measure I funds.

When Victorville did not sign the project advancement agreement, SANBAG elected a project in Hesperia that will construct carpool lanes for Interstate 10.

The Nisqualli project is just one more vital organ to goods movement within the High Desert area since it intersects with Interstate 15 and would be built to relieve the pressure on State Route 18 and Bear Valley Road helping link Victorville with Apple Valley.

"Bear Valley Road has a huge amount of traffic. We're looking at upwards of 70,000 vehicles per day," said Rob Kurth, executive vice president at Lee & Associates' Victorville office. "Bear Valley is mostly used for residential cars but there are a lot of trucks too."

Ultimately, State Route 18 would be realigned and constructed into a four-lane expressway serving as the end of the E-220 corridor where State Route 18 meets Joshua Road in Apple Valley.

In the immediate future Kurth said the area's larger industrial tenants will benefit mainly from Phase 1A of the High Desert Corridor project.

"Victorville is setting up its intermodal operations out of the airport [Southern California Logistics Airport] and is gaining steam on industrial users," Kurth said. "The real play for industrial brokers is that once these guys set up in that area, they've got a nice corridor to get from the airport to the 15 freeway. Right now all we have is Highway 395, which is highly congested, and there are [fewer] lanes. We're getting a lot of truck traffic going to the SCLA." Stirling Capital Investments' Southern California Logistics Airport, a part of the 8,500-acre Global Access multimodal hub in Victorville, is one of the major examples of why the High Desert Corridor project is seen as necessary. The E-220 corridor would improve access to SCLA and anticipated future development projects.

"I think right now we're a little bit behind with infrastructure as we're starting to ramp up development in the High Desert," Kurth said. "We see the next wave of growth is in industrial development. It's going to take a lot of infrastructure in the cities up here and anyone involved in planning has that as their main focus."



- E-mail Kari _Hamanaka@DailyJournal.com





Without that highway, industrial development in the High Desert is suspect. Without large scale industrial development, the High Desert will not get the jobs and the taxes that it needs to attract more development.



The infrastructure will come eventually, bad news for today's landowners.

SLOOS: The Development World Is Under Our Boot

As I mentioned earlier (3 months ago) I was a little concerned with the results of the SLOOS (Senior Loan Officer Opinion Survey). Concern has turned to pale-faced horror.

About 55 percent of domestic banks—up from about 30 percent in the January survey—reported tightening lending standards on C&I loans to large and middle-market firms over the past three months. Significant majorities of respondents reported tightening price terms on C&I loans to these firms, and in particular, on net, about 70 percent of banks—up from about 45 percent in the January survey—indicated that they had increased spreads of loan rates over their cost of funds.
In addition, smaller but significant net fractions of domestic banks reported tightening non-price-related terms on C&I loans to these firms over the past three months.
Regarding C&I loans to small firms, about 50 percent of domestic respondents reported tightening their lending standards on such loans over the survey period, compared with about 30 percent who reported doing so in the January survey. On net, about 65 percent of banks—up from about 40 percent in the January survey—also noted that they had increased spreads of C&I loan rates over their cost of funds for these firms.

Translation: No Money, No Honey.



Developers need credit to build things, it makes sense to take out loans and leverage yourself with borrowed funds rather than finance the whole project yourself. Few people buy homes with a dump-truck full of money, they usually take out a mortgage and will pay it off in little bits until they move or die.



Developers are the same way, and development is severely impacted by changes in money and debt markets. Cutting off the supply of loanable funds is akin to shutting off the sun; we can expect that as money continues to tighten construction workers will continue to fill the bread lines.

Frank A. Smith Has Passed Away

A great friend and colleague of ours, Frank A. Smith, passed away this past weekend. The cause of his death is not yet known, but is suspected to be natural causes. Frank's family is planning a service for him possibly later this week. Please refrain from calling - I will send the information via email as soon as it becomes available.


Jerry Holdner
Vice President of Market Research

Voit Commercial Brokerage

Weaker Industrial Demand, More Of The Same

This is from Torto-Wheaton Research, who is uniquely positioned to monitor the real estate situation from 30,000 feet. Bill Wheaton is a real estate professor at MIT and one of the few economists who has done groundbreaking research in Real Estate, he literally wrote the book on real estate economics.

That being said, what this chart suggests is that while Los Angeles and Orange County have reported large negative net absorption numbers, they are not as bad as say, Detroit.

Few things are worse than Detroit, very few precious things in this world, but it says a lot about what is actually going on here. Negative net absorption means that more people are moving out of their spaces than new people moving in. Negative net absorption almost always leads to a rising vacancy rate; occupied building demolitions with a 0% vacancy rate is the one exception I can think of, since occupied SF will change but the vacancy rate will not.

In any case, all these markets on this chart had increases in the vacancy rate, some more than others. The vacancy rates in OC and LA changed less than a percentage point over the year, but due to the size of the industrial market, has led to large negative net absorption.

Los Angeles and Orange County are better positioned than most of the regions on this list for two reasons; the vacancy rate in LA and OC are dangerously low and in comparison with many of these other regions there is little construction that can take place so overbuilding did not occur.

One culprit is noticeably missing from this chart: yours truly, the Inland Empire.
TWR had positive net absorption for the Inland Empire (+4.7 Million SF), and even I reported some fairly optimistic numbers (+2.2 Million SF).

For the Inland Empire things can go wrong pretty quickly but I don’t think we will end up on this list this year; there are plenty of large deals that were signed in the last 5 years that should carry us through this down-turn, provided the worst is already over. If consumer spending doesn’t increase and if building construction continues at its breakneck pace, (which it hasn’t, construction has been very responsive at least from what I have been seeing so far), then we might see some negative net absorption by the end of the year.

But at least we will be better shape than LA, OC or *gasp* Detroit.

MY TENANT JUST FILED BANKRUPTCY, NOW WHAT?

From AIR:

MY TENANT JUST FILED BANKRUPTCY, NOW WHAT?

Top Ten Considerations for Commercial Landlords

The real estate-driven economy has been so good for so long that some landlords may have forgotten how bankruptcy laws impact their rights when a tenant files bankruptcy. Moreover, the bankruptcy amendments of 2005 have changed those rights, so the rules that landlords may remember have been altered since the last real estate slowdown.

First, a bankruptcy may prevent the eviction of a tenant.

When a tenant files bankruptcy under a commercial lease, the first thing a landlord usually wants to know is how to evict the tenant. Unfortunately, the bankruptcy filing prevents the landlord from doing so, at least in the short term. Commencing or proceeding with an eviction without previously asking the bankruptcy court for permission can result in damages being awarded against the landlord.

Second, the tenant must continue to pay rent to remain in possession.

For the privilege of staying in possession of the leased location, a tenant is obligated to pay all of the rent and other charges as they come due under the lease during the bankruptcy for as long as the tenant remains in possession of the premises. However, if there is unpaid rent or other charges that came due prior to the bankruptcy filing, the tenant does not have to pay past due amounts in order to remain in possession.

For example, in the recent Wickes Furniture bankruptcy case, Wickes timed the bankruptcy filing in order to maximize its cash flow by filing for bankruptcy two days after the rent on its various locations came due. Therefore, at least in terms of its immediate obligations, Wickes was able to avoid paying one month’s worth of rent on those specific locations.

Third, the tenant has up to seven months to decide.

After filing bankruptcy, the tenant has three options.

1. It can reject the lease,

2. keep the lease,

3. or assign the lease.

The tenant initially has 120 days to make its decision. The tenant can ask the bankruptcy court to extend that decision-making time period for up to 90 days, for a total of 210 days (or approximately seven months total from the date of the bankruptcy filing). After that 210-day period expires, the court has no power to grant further extensions unless the landlord agrees to an additional extension. During this decision-making time period, the tenant must remain current on its rent.

Fourth, if the lease is priced over market, it is likely that the tenant will reject the lease.

In order to reject the lease, a tenant has to notify the Bankruptcy Court and the landlord that it wishes to reject. It is almost impossible to force a tenant to keep a lease that the tenant views as unfavorable. Once the Court accepts the tenant’s decision, the tenant must surrender possession and is no longer required to pay rent. The unpaid rent then becomes an unsecured debt of the bankruptcy estate.

Fifth, the tenant may choose to stay.

If the tenant determines that the lease is important to its ongoing business, it may choose to keep the lease (referred to in bankruptcy parlance as “assuming” the lease), the tenant must ask the bankruptcy court for permission, and must meet previously unmet obligations or provide adequate assurance that it can promptly meet existing obligations.

In the Wickes Furniture case, in order for Wickes to keep a particular location, Wickes would have had to pay any past due rent. A tenant who wishes to keep the location must also pay any contractually required attorneys’ fees incurred by the landlord (except for attorneys’ fees incurred in bankruptcy court litigation), and must demonstrate to the court that the tenant has the ability to perform the lease obligations.

Sixth, the tenant may choose to assign the lease.

If a lease is under market, yet not critical to the tenant’s ongoing business, the tenant may choose to assign the lease to a new party. In order to do so, the original tenant must ask the bankruptcy court for permission, and must satisfy all lease obligations, including the payment of past due obligations. In some instances, the new tenant may be willing to satisfy the original tenant’s past due obligations.

Seventh, anti-assignment provisions in the lease are unenforceable.

Sometimes, the new tenant (assignee) may be willing to pay the original tenant for the opportunity to take over as tenant. The original tenant is entitled to whatever sums it can negotiate with the new tenant, regardless of any lease provisions which provide that the landlord is entitled to capture those sums or even if the lease provides limitations on assignment. The bankruptcy court will normally approve the assignment to a new tenant notwithstanding such lease provisions. However, the original tenant must demonstrate to the court how the assignment will allow it to perform under the lease obligations. Also, unlike under state law, the original tenant will no longer remain responsible for payments due under the lease after the assignment.

Eighth, shopping center landlords have stronger protections against unfavorable new tenants.

If the location is part of a shopping center, landlords have four additional protections:

(1) the new tenant must be at least as financially sound as the original tenant was at the time the lease was originally signed;

(2) the new tenant must show that percentage rent will not decline substantially;

(3) the assignment may not disrupt the tenant mix;

(4) the assignment may not violate any location, use, radius or exclusivity provision of the lease or of any other leases at the shopping center.

Ninth, landlords must be proactive with untimely tenants.

Prior to a bankruptcy filing, proactive landlords can enhance their chances of avoiding the bankruptcy problems discussed above through the timely filing of a proper unlawful detainer complaint. If a tenant fails to pay rent, the landlord should serve the tenant with a three-day notice to pay rent or quit and immediately file an unlawful detainer complaint. If the landlord is able to file the complaint before the tenant files for bankruptcy, the lease is deemed terminated as a matter of law, the tenant no longer has rights under the lease, and the landlord can evict the tenant without being subject to bankruptcy laws. Therefore, if the landlord suspects that a bankruptcy filing by a tenant may be imminent, acting promptly when rent is not paid timely may be the difference between obtaining immediate possession or being dragged into bankruptcy court.

Tenth, don’t wait to contact bankruptcy counsel.

It is important for landlords to understand that in bankruptcy proceedings, tenants obtain rights they would not otherwise have and landlords lose certain rights that they normally enjoy under state law. As a result, it is critical for a landlord to move quickly in the event of a bankruptcy (or even before bankruptcy if at all possible) to enforce its rights to receive current rent, to protect itself against an unwanted assumption or assignment or (if pre-bankruptcy) to evict the tenant.

Over the decade and a half that I have been representing commercial landlords, it has become clear that those landlords who act promptly by engaging bankruptcy counsel early on in the process are far better positioned to protect themselves in bankruptcy court than those who are slow to respond. Acting quickly can also minimize the legal expense resulting from bankruptcy proceedings.

About The Author:

Jeff Krieger is a bankruptcy attorney with the Los Angeles-based law firm Greenberg Glusker. He can be reached at jkrieger@ggfirm.com.