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.