Shipments in the US

Sorry I have not been posting much lately, the cruel lash of 4th quarter (and end of year) market reports has kept me at bay.

And there has been so much worthwhile things to blog about.

But the tasty trinket that most caught my eye was this, a brief article released by the 2007 Economic Cencus: Nationwide Movement of Goods

This is a 5 year figure calculated by the Bureau of Transportation Statistics and the U.S. Census.

In 2007:

Total shipments of goods in the US accounted for 11.7 Trillion in revenue ($11,700,000,000,000).

This is up from $8.4 Trillion in 2002 ( a 40% increase in just 5 years).

12.5 Billion tons of goods was hauled, up from 11.7 billion tons in 2002. ( a 7% increase). I.E. what we are hauling is worth more. (FYI these are inflation adjusted numbers).

Trucks hauled 71% of the total value (or 8.3 Trillion Dollars, 8.8 Billion Tons)

55% of tonnage traveled less than 50 miles.

For-Hire freight (3PL's etc.) shipped an average of 599 miles.

Public Truck Shipments shipped an average of 57 miles.

What does this mean?

The value of what is shipped drastically increased.
Trucks are still how goods end up in the hands of the consumer.

Short Haul trucking makes up the majority of shipping.

I am guessing most of these goods were counted twice or more, once as raw goods to a manufacturer, then to a wholesaler distribution center, then to a retailer local warehouse, then to an acutal retail store. The 3pls will take it from manufacturer (or manufacture it themselves) thus they travel longer distances, while the public truck shipments are from a local warehouse to a local retail store.

The reason why I am guessing these goods were double counted is that the GDP of the US in 2007 was only 13.8 Trillion, and it is impossible for shipping to account for some 85% of GDP.

Sad (and Funny) but True

http://www.newstatesman.com/ideas/2009/12/assets-loans-products

Call it a load of old bull
Harry Shearer

Published 03 December 2009

Bad banks, troubled assets and securitised loans – such linguistic tricks just add to the madness of the crisis

Euphemisms, by their nature, are supposed to plaster over unpleasant truths. In my adopted home town of New Orleans, a city known for its straight talking, the estate agents have lately taken to renaming the little residen­ces at the backs of main houses - long known by their truthful name, "slave quarters" - as "dependency units". The mind rebels.

I always thought of the economic and financial worlds as similarly resistant to euphemising. We had bulls and bears, of course, but those were metaphorical caricatures of real attitudes. Most of the jargon of the money world was, if anything, mind-numbingly literal: puts and calls, debentures and debt. But that all changed during the recent madness, a madness that may have been exacerbated by the looseness of the language.

This was a time, after all, when financial services began to be called "products". Conventional thinking would suggest that if I lend you money I haven't given you a product; I've afforded you (temporarily) the means to purchase products or services. But that was the term financial firms, insurance companies and banks started to use to refer to what they were offering.

Did it make people in these enterprises feel more muscular, less nurturing? Was it a linguistic farewell wave to a manufacturing economy, disappearing just as finance took centre stage? Seemingly innocuous, this change naturally led, as it did in the world of actual products, to an important next step: product innovation. Loans are loans, but a loan product seems awfully lonely up there on the shelf, all by itself. It needed some friends, some fellow products. Some friends.

Enter Ninas, home loans that required from their prospective borrowers "no income, no assets". Like the other loan "products", they had something in common with their manufactured brethren: once sold, they left the purview of their sellers. As with products, future responsibility for them was farmed out to someone else, preferably in Bangalore. Calling these things products made it possible, maybe even mandatory, to treat them as such. The only "service" left in the equation was the "servicing" of the loans, which itself was a euphemism for collecting.

Calling these loans Ninas feminised them, made them seem cute, charming, a little naughty, perhaps, but not criminal. Just as referring to the whole class of loans as "sub-prime" avoided the unpleasantness of the reality that they were junk. It's like describing someone on his deathbed as "sub-well".

When things started going bad, the language started getting even cuter. A year ago, we were told that the main cause of the crisis was the crushing burden of "toxic assets" - home mortgages lent to borrowers who could afford to pay them off just as soon as pigs filed flight plans. That's why three-quarters of a trillion dollars went from the US treasury into the Troubled Assets Relief Programme, or TARP (reassuring, isn't it? A safe plastic covering, in capital letters), supposedly to get these toxic assets off the books of the banks. In fact, entirely something else happened with the money, and with the language. While the federal funds became a simple cash infusion into favoured banks, the word "toxic" was nudged aside in favour of "troubled". Really. The assets were now to be seen as delinquent youths, their faces smudged with dirt, their clothes tattered but their souls still full of potential. It wasn't really their fault. They didn't need to be wiped off the books, just . . . understood.

Where were those assets supposed to go? Many officials proposed the notion of a "bad bank". Again, just a miscreant, like the dog that poops on the living-room carpet. Bad bank! Sit over there in a corner and think about those stinky mortgages you're collecting! It's a rolled-up newspaper to your noggin if you try it again. Of course, the main thrust of this particular euphemistic gambit was a brave attempt to convince us that there was, by contrast, such a thing as a good bank. Nice try.

When you want your euphemising to be particularly opaque, you go French. Hence, "tranche". Look it up and the dictionary will tell you it means "slice", but that sounds like something that's done in a delicatessen, parcelling out thin portions of pastrami to the waiting rye bread. That's not what sophisticated gents (and ladies) in bespoke suitings do inside Important Offices. The desired effect of tranche was to induce a tranche-like state, in which investors would come to assume that the people slicing up pieces of bad mortgages actually knew what they were doing.
This leads us to "securitising", which is to securing as "believitising" is to believing. In fact, believitising would be the creation of exactly the level of credulity this stuff called for; unfortunately, nobody bothered to coin that word until just now. The essence of securitising was persuading the financial ratings companies, by means as yet unknown, that a collection of slices of crappy mortgages (or a slice of a collection, take your pick) could be an AAA-grade investment. Those letters are themselves a kind of linguistic shorthand, as what they're really saying is: "Of course, this posits a new scale on which, if securitised mortgage packages are AAA, a truly secure investment would be ratedAAAAAAAAAAAAAAAAAAAAA+++." That is, it would be ratingised.

When the market tumbled a year ago, there was an uptick within a few weeks. That started a discussion about whether or not this was a "dead cat bounce", the short-lived surge upward before the destined plummeting resumes. When I first heard the phrase, I thought it was the name of a particularly inelegantly titled 1940s dance tune. But no, it's an example of financial malphemism, in which a mere reversal of market direction is depicted as an act of cruelty to animals - the dropping of an expired (or soon-to-be-expired) feline for the purpose of measuring gravity's effect on its air-worthiness. The deliberate crudity of the phrase probably reflects its origins among short-sellers and their contempt for any sign of hope.

Which brings us to the pedlars of positive thinking, among whom "green shoots" have contended with "glimmers of hope" as the optimistic usage of choice. "Green shoots" implies an organic process of growth, outside human control, but dependent on the season. "Glimmers" are more promising, requiring neither a green thumb nor the right time of year to make their appearance. This phrase has been a par­ticular favourite of the US treasury secretary, Timothy Geithner. Visualising these glimmers became for him almost an evangelical enterprise. Were they just an aurora geithnerealis, or were they signs of a true recovery? Don't ask, brothers and sisters, just believe.

And then there is the word tossed around blithely by CEOs and financial journalists alike, designed to drain all the dread out of one of the most frightening consequences of economic slowdown. That word is "shed" - not as in the little building out back where you keep your tools, but as in what prudent companies do to jobs. We've not been experiencing the widespread throwing of people out of work recently, just the shedding of jobs.The word makes the process sound all National Geographic, like what snakes do with their skins every whenever. But its progress has not yet led it to the scene of the actual transaction: "Bill, we value your contribution to the company over the years. I'm sorry, but we're going to have to shed you." No, "let you go" still is the go-to euphemism. Which raises the question: "But what if I don't want to go?" We're still letting you do it.

Contemplating these linguistic tricks inspired me. I have written songs around them, including "Bad Bank", "Troubled Assets", "Dead Cat Bounce" and "Glimmers of Hope". They appear online as part of a collection of compositions about the meltdown, named after the two contending forces in stock markets: Greed and Fear. It was an act not so much of composing, frankly, as of songitising.

Harry Shearer plays more than 12 characters in "The Simpsons" and was Derek Smalls in "This is Spinal Tap". For more information, visit his website.

Unemployment Drops?

Nonfarm payrolls fell by just 11,000 last month, slowing down from a downwardly revised 111,000 drop seen in October, as the recovery encouraged some companies to retain workers, the Labor Department said Friday.

But, if the total number of unemployed actually increased, how can the unemployment rate actually drop?

Well, according to the people who actually track the unemployment rate (my hero, the BLS), the unemployment rate is the number of unemployed person's divided by the labor force.

So how can the number of unemployed increase while the rate goes down?

Here is the definition of an employed person:

Persons 16 years and over in the civilian noninstitutional population who, during the reference week, (a) did any work at all (at least 1 hour) as paid employees; worked in their own business, profession, or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family; and (b) all those who were not working but who had jobs or businesses from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs. Each employed person is counted only once, even if he or she holds more than one job. Excluded are persons whose only activity consisted of work around their own house (painting, repairing, or own home housework) or volunteer work for religious, charitable, and other organizations.

And here is the definition of an unemployed person:

Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.

And here is why I think the unemployment rate went down:

Discouraged workers (Current Population Survey)
Persons not in the labor force who want and are available for a job and who have looked for work sometime in the past 12 months (or since the end of their last job if they held one within the past 12 months), but who are not currently looking because they believe there are no jobs available or there are none for which they would qualify.

If the number of discouraged workers increases at a faster rate than actual job losses, the unemployment rate will go down. I.E. if the number of people who were laid off in Nov 2008 is higher than the number of people who have been laid off in Nov 2009, the unemployment rate will decrease.

Here is the full press release from the BLS.

A broader measure of unemployment, U-6, counts discouraged workers and those marginally employed. It stands at 17.2%. This is actually down from 17.5%.

So, maybe the economy is creating jobs and this is more than just a statistical recovery. In any event, more will have to be seen before you can call this a trend.

Maybe this video will clear things up:

Retail sales expected to drop 1%

From Business Week:

Spending at stores and on Web sites from Nov. 26 to Nov. 29 rose 0.5% to an estimated $41.2 billion from $41 billion a year earlier, the Washington-based trade group said Nov. 29, citing a survey conducted by polling firm BIGresearch.
The higher turnout and lower average spending were in line with expectations,the NRF said. The group is sticking to a forecast for a 1% drop in spending this holiday season.

Consumers who are expecting severe price cut are probably going to be disappointed this holiday season. The reason is that retailers already factored in lower sales in their orders. Thus they ordered less. Thus the have to sell less at higher prices in order to make ends meet.

Compare this with two years ago when retailers ordered too much, since proper demand levels were less clear as the recession had just started. They had large inventories to work down and thus more drastic prices to cut in order to make ends meet.

The disconnect between expectations and reality is where you will see the large price movements, as price is the clearing mechanism for the market.

ProLogis To Develop 667K In Ontario

In what is the rarest of development deals, ProLogis will be constructing a 667,000 SF industrial warehouse in Ontario. This will be the first development deal in around 6 months.

http://bit.ly/6vnTzF

I thought the development days were behind us, since the amount of available inventory is such that sales prices have dropped below replacement cost in many instances. This means that it would be cheaper to buy a building than to construct one.

Except for the really, really large ones. Currently in the West Inland Empire there are 3 available empty buildings above 600,000 SF, all asking around $0.33 NNN.

No word yet on if this is a consolidation deal, but Home Depot has a 650,000 SF lease rolling at then end of 2010 in Industry, and 480,000 SF rolling at the end of 2011 in Ontario.

Originally, the building was planned as a 1 Million SF building, but now that 667K will be constructed, what is going to happen with the remaining 330k?

Father of Transporation Economics

http://bit.ly/AS1to

Mr. Meyer’s insights help us understand why rail’s share of American freight traffic increased substantially after deregulation in 1980. In 1958, when Mr. Meyer was writing, Congress reduced their obligations to maintain unprofitable passenger lines. In 1980, the Staggers Rail Act radically reduced the rate-setting authority of the Interstate Commerce Commission. Today, rail carries 38 percent of freight in the United States, but only 8 percent of freight in Europe. While the bulk of the difference in rail freight between the United States and Europe can be explained by innate differences like longer distances and less coastline in America, one estimate is that rail’s share of European freight would approximately double if Europeans adopted different policies.

3rd Quarter Bank of America, Merrill Lynch Industrial Transcript

Here it is:

I am getting better in terms of speaking. It really helps writing out all your points ahead of time. It was more like reading from a script rather than a top of mind speech.

The day after I found out about a 350K SF investment sale at below replacement cost that happened at the beginning of the month. That is something I should have known, its kinda a big deal.

I also should have mentioned the Pannatoni investment sale, that is going to be big news, but if it happens in the next week or so, it will be old news by the time of next quarters call.

Oh well.

October Article is out

SB Sun:

Market may be turning

For industrial brokers and landlords alike, small signs of improvement may be beginning to form on the horizon.

For the third quarter of 2009, the industrial vacancy rate continued to increase, from 15.1 percent last quarter to 15.4 percent, currently the smallest quarterly increase in vacant space in two years.

Warehouse and distribution centers are the industrial backbone of the Inland Empire and as home construction, foreign imports and manufacturing have stalled, demand for industrial real estate has been at an all-time low.

The market uncertainty is difficult for young brokers who are just getting started.
"It is a tough time for brokers like me who are new to the business" says Kosha Arabi, an aspiring industrial real estate broker.

"Landlords and tenants are more interested in advice and consultation than in doing a deal, and it becomes a great time to build relationships."

Industrial construction over the past two years has added more than 35 million square feet of space to the market, much of it empty speculative space. In addition, companies continue to consolidate their operations or go out of business. Over the past two years occupied industrial space has shrunk by more than 12 million square feet.

Blackstone Said to Drop Plans to Sell Beverly Hills Properties

Article is here: The reason I am mentioning it is because it is Bloomberg, and Colliers GLA is making news.

Landlords without immediate pressure to repay debt can afford to hold onto assets in hopes of getting higher prices when the market recovers. Blackstone also has been an active seller. The firm or its acquisition targets sold more than $25 billion of assets from 2005 to 2007.

Hilton had occupied the Beverly Hills headquarters, at 9336 and 9346 Civic Center Drive, since 1985 after moving from the Beverly Hilton Hotel. The lodging company, which changed its name to Hilton Worldwide, moved its head office to McLean, Virginia, this year.

Asking rents for the best-located, most desirable space in Beverly Hills fell 10 percent in the third quarter from a year earlier to $48.60 a square foot per year, according to Colliers. Landlords are offering 15 percent less than that in first-year leases to attract tenants, said Michael Soto, research analyst for Colliers International.

Clean Trucks Program: Cleans Jobs Out?

LABJ:

The program seeks to eliminate old polluting trucks from the ports. The program in October 2008 banned trucks made before 1989. But on Jan. 1, a more stringent ban extends to all trucks made before 1994 and those that have an engine made before 2004.

It’s unclear how many trucks will be sidelined as a result, but the number is a big one. The ports earlier estimated that as many as 12,000 trucks would fall into that criteria, but last week the L.A. port estimated 4,000 to 6,000 trucks would be banned Jan. 1.

A new diesel truck costs about $100,000, while retrofitting a truck with a new engine costs about $10,000 to $15,000. Many small trucking firms, already scraping by on low margins, paying off existing trucks and whacked by the downturn in business at the ports, say it’s not worth it to load up on debt to stay in the industry.

As with most things, the costs will be often be known and immediate, but the benefits will be hard to measure and not for some time. The dirty trucks will end up in Mexico or some other place, the drivers will find new work or move out of the state.

Hopefully, other ports across the country adopt the standards imposed here in Southern California, then at least the playing field will be even.

Trade & Industrial Development

There is a magazine for this: Here

Has a section on manufacturing, that I liked:

The Power of Manufacturing

John Engler

A widespread misperception exists in our country that we have lost our manufacturing base – that manufacturing has migrated to other countries while we have evolved into something called a “service economy.” In reality, the United States was and remains the world’s largest manufacturer in terms of the dollar value of manufactured products. Manufacturing remains the core driver of innovation and economic growth.

Without question, a substantial portion of our low-tech manufacturing has shifted overseas. China, in particular, has aggressively expanded into the manufacture of consumer products that today flood discount stores from coast to coast.

But the United States still dominates the more advanced industries – capital equipment, aerospace, machine tools, computer technology, robots, pharmaceuticals, chemicals, missiles, heavy earthmoving equipment, etc. You see the “Made in China” label on your child’s stuffed toy; you don’t see the “Made in USA” label on the satellite spinning overhead.

It is true that manufacturing is no longer the job creator it was a generation ago. This is largely because of quantum leaps in manufacturing productivity that always translate into fewer jobs. But by and large, they are more advanced jobs that offer excellent pay and benefits. In fact, one of the biggest problems facing our manufacturers today is the scarcity of qualified manufacturing workers.

America is the world's largest manufacturer based on value of goods (still) and Los Angeles County is the nation's top manufacturing center (still).

Southern California has the nation's largest industrial base, and a good chunk of that is still manufacturing, what used to be the backbone of the country.

Census FT900 Imports / Exports for August

Here is the most current issue of the Census Bureaus & BEA joint venture on the balance of trade.


The recession continues to dampen both imports and exports. Imports are especially troubling, down 28.6 percent over the previous year.

Automotive vechicles and parts posted the only increase, mainly due to the Cash for Clunkers program.

LA Basin Report Finished

The crown jewel of industrial reports, the Los Angeles Basin industrial report, is now finished.

It can be found here:

Los Angeles County suffered the worst losses this quarter, with Central Los Angeles posting the worst quarter ever, -2.4 million SF given back. San Gabriel Valley continued to lose space as well, giving back 962K. Most of these space givebacks were in the City of Industry, which is the industrial heart of the San Gabriel Valley.

Both Central Los Angeles and the San Gabriel Valley are under pressure from neighboring Inland Empire.

Vacancy Rate for LA County: 5.4%, up from 4.8% last quarter. Absorption was negative 4 million SF and rents have dropped to $0.54 NNN PSF for the region.

Inland Empire industrial rental rates have continued to fall, ending the quarter at $0.34 NNN, the lowest rental rate in the Basin and and the lowest rates since 2004. An increasing amount of landlords are refusing to publish asking lease rates, preferring to leave them as negotiable. This makes my life harder, since nailing down negotiable rents requires a lot of footwork.

The vacancy rate increased to 15.4%, only slightly higher than 15.1% that was posted last quarter. There is a pretty good chance that absorption will be positive next quarter if leasing and sales activity remains high in the West Inland Empire. I would say that the chance of a declining vacancy rate for the West Inland Empire next quarter is 50 - 50. The pace of givebacks is decreasing and firms are starting to take space. Will be interesting, keeping my fingers crossed.

Orange County is also humming along. Absorption was only negative 411K, but leasing activity remains low and Orange County is not immune from tenants moving to cheaper markets. Rents remained constant at $0.67, the highest in the Basin.

Third Quarter Reports Now Avail!

Click above to access the third quarter reports for the Inland Empire, San Gabriel Valley and Central Los Angeles industrial markets.

Surprising twists and turns. Who knew the Inland Empire industrial market would do better than the infill San Gabriel Valley and Central Los Angeles industrial markets?

I did not predict that one, I assumed that recovery would happen inside out, from the South Bay to the East Inland Empire, a series of demand dominoes emanating from the port.

I did not think that the epicenter of recovery would be Ontario / Fontana. That drops in price would change the entire demand equation.

Social Networking For Commercial Real Estate 101

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IE commercial real estate: It's a buyer's market

SB Sun:

There's a bright side to the Inland Empire's depressed commercial real estate market: It's a great time to be a buyer.

That's only if your business has an A-plus financial track record.

Experts say local companies with the best earnings - and who've been renters for years - are naming their price when it comes to finally purchasing property to house their operations.

And for businesses looking to rent, their per-square-foot lease offers that landlords would've laughed at a few years ago are now dominating the market.

It's both a buyer's and renter's market, and business tenants will run into more alluring options going forward, according to one broker.

"I think `opportunity' will be the buzz word for 2010," said Matt Millett, senior associate at Coldwell Banker Commercial Lazar & Associates in Redlands, which brokers both office and industrial real estate.

There's so much space going vacant in San Bernardino and Riverside counties, rates are getting super competitive, and landlords are scrambling to retain tenants, whether they be furniture retailers, law firms, goods distributors or restaurateurs.

Sales prices have dropped so much that some landlords are breaking even or losing money when they sell off property.

It's going to take two to four years before the Inland Empire's oversupply of commercial space is sold or rented out, according to several brokers.

"Landlords are going to the tenants early on and saying, `What will it take to keep you here?'," said Thomas Galvin, research associate with Colliers International in Ontario, who studies industrial property trends. "But the tenant has no idea what a good deal is. They don't realize that if they poke around the market, they could save a lot of money by finding a different property."

Galvin's preliminary estimates show that the average purchase price for industrial space in east San Bernardino and Riverside counties will have plunged from a peak of $97 per square foot in second quarter 2007 to $61 in third quarter 2009 - a 37-percent drop.

So who's buying this real estate, anyway?

If they aren't local mom-and-pop manufacturers and retailers who've been nesting on a wad of cash, there's a good chance the buyers are Asian.

About 80 percent of commercial real estate purchases that Milo Lipson helped broker over the last year were deals where the buyer was headquartered in China, Taiwan, Japan or Korea, or they were Los Angeles-area based subsidiaries with parent companies in those countries.

"They've been using warehouses out here already, but now they're cutting the warehouse middle-man out," said the senior vice president of the industrial division at Grubb & Ellis's Ontario office. "They're buying these buildings at a discount and setting up their distribution hubs out here."

On the rental side, huge concessions are being made by landlords in the tug-of-war on lease rates.

Because square footage rates are so cheap, businesses are pushing for seven- to nine-year leases when their terms mature, Lipson said.

Instead, commercial real estate owners are rebutting those offers with proposals for two-, three- or five-year leases, where the landlords have the option of raising the rent to market value during the last year.

Lipson and Millett said they're seeing more deals secured over the last couple of months than they were in late 2008 and early 2009. The market was "dead" back then, they both said.
"It's picked up recently," Lipson said.

While it's not clear whether the market is hitting a bottom, "we've seen some positive signs lately," Millett said. "People are starting to peak out from under their rocks."

One fundamental change going forward: owner financing will continue gaining popularity, according to Rick Lazar, president of the Coldwell brokerage in Redlands.

It's tougher than it was a few years ago to secure credit lines from banks to buy office or industrial space.

But some of the same landlords willing to bend over backwards when it comes to price are also offering to lend businesses the money needed to secure a deal.

"There's no question it will play into the future when the opportunity presents itself," Lazar said. "It's going to get bigger and bigger."

By the numbers:

Preliminary third-quarter 2009 commercial real estate vacancy rates:

* West Inland Empire industrial market - 10.6 percent

* East Inland Empire industrial market - 23.3 percent

* Total Inland Empire office market - 23.7 percent

Source: Colliers International

Older than America Itself

Happy 250th Guinness

Los Angeles Basin Week In Review

Phase III of NoHo Commons One Step Closer to Completion
Bomel Construction Company just completed a 766-space, cast-in-place parking structure for Phase III of NoHo Commons, a crucial step indeed for the much anticipated mixed use development at Lankershim Blvd. and Weddington St.John DeGrinis, Patrick DuRoss and Jeff Abraham of Colliers International represented the lessor, ARKA Properties Group and Black Equities Group. Jeff Myers of CBRE represented Quest Diagnostics in the deal. Quest plans to use the space for its logistical service center operations.
Click for More


Southern California's vital signs are improving
Signs are increasing that an economic turnaround has begun in Southern California, even as residents and businesses continue to struggle in the worst downturn in decades.The state's exports are growing as overseas consumers, especially those in Asia, are demanding computers, electronics and agricultural products from California. Tourists are starting to return to the region's hotels and beaches. And home prices appear to be stabilizing in some of the Southland's hardest-hit markets.
Click for More

PwC Survey: Defaults Could Jump-Start Stalled Distressed Buying Opportunities
Despite rapid deterioration of commercial real estate fundamentals, equity investors have been frustrated with the lack of distressed buying opportunities. However, according to the third-quarter PricewaterhouseCoopers' Korpacz Real Estate Investor Survey, investors anticipate near-term defaults combined with looming due dates on commercial mortgage-backed securities (CMBS) maturities to jump-start distressed buying opportunities during the next year.While some investors are looking to the $153 billion of CMBS loans due in 2012 to spur buying opportunities, commercial banks account for a much greater percentage of the total looming debt and could provide distressed sales sooner than 2012.Click for More

Commercial Real Estate Delinquency Rates Climb
Delinquency rates for commercial real estate loans continued to rise in the second quarter, the Mortgage Bankers Association (MBA) says in a new report.The delinquency rate on loans held in commercial mortgage-backed securities (CMBS) and at least 30 days past due rose from 1.85% to 3.89% between the first and second quarters. Meanwhile, the delinquency rate on loans held or insured by Fannie Mae and at least 60 days past due rose from 0.34% to 0.51%, MBA notes.
Click for More

Texas Fed - Post Tramatic Slack Syndrome

:
From the Dallas Fed

Until the summer of last year, businesses were emboldened by a prolonged period of ready money and robust global demand. They were geared toward the expansion of plants, equipment and payrolls. At the same time, inflationary pressures were building. Businesses took every measure possible to boost their top lines by passing on rising costs through higher prices. As we entered the summer of 2008, the inflation data exhibited frightful tendencies. Of the 178 items in the consumer’s basket used to measure PCE, 77 percent were rising, and the number rising above 3 percent per annum was the highest we had seen in nearly two decades.
There are limits to the costs that can reasonably be passed on to consumers without damaging top-line revenue performance. Thus, simultaneously, businesses worked like beavers to preserve their bottom lines by controlling the costs of goods and services they sold, shifting their management models and budgeting accordingly.

Then they experienced a traumatic shock. Demand imploded. The equity and fixed-income markets seized up. Bank credit evaporated. The growth of the global economy hit a wall. Whereas just over a year ago managers were coping with a pervasive scarcity of inputs and escalating prices, there is now an abundance of almost every input and output and no pricing power. There are too many ships at sea; too many rail cars; too many airplanes and trucks; too many homes; too many hotels and apartments and office buildings; too many retail stores and malls and convenience stores; too much oil, natural gas and corn; and, according to Wall Street Journal reports this week, even too much champagne and bottled water.

And yes, thank you Lord, we have finally come to realize there are too many lawyers.

In almost every sector of the economy—save for nonelective medical services and a few basic commodities being hoarded by the Chinese—the CEOs I survey are struggling to cope with excess capacity and slack.

Businesses trying to sell products and services feel they are pushing on a string and are adjusting their behavior accordingly. To maintain sales volumes and clear inventories in the face of weakened demand, they are cutting prices. Beginning in the fourth quarter of last year, we began to see an upward shift in the number of items falling, rather than rising, in price. In the July data just released, almost 50 percent of the items in the PCE basket—weighted either by simple count or expenditure—were falling in price. Small wonder that headline inflation was negative over the year ended in June: This is the first time since 1955 that we have seen deflation.

Evaluating the Numbers

The new numbers tell me two things. First, for the immediate future, the risk to price stability is a deflationary risk, not an inflationary one. And second, given they are operating in the shadow of the absence of pricing power and the pervasive difficulty of expanding top-line revenues in the face of weak demand, businesses will continue to run tight budgets as they try to preserve profit margins. They will continue to focus on cost control, most painfully by shedding workers and driving those who remain on the payroll to higher levels of productivity.
All of which means that we are likely to see a prolonged period of sluggish economic performance and uncomfortably high unemployment as businesses reallocate capital and labor to fit the new economic landscape.

The needed reallocation of labor and capital has been, and will continue to be, impeded by financial markets. Although substantially improved from last fall—due in significant part, I would argue, to the work of the Federal Reserve—markets are still a long way from having normalized. We know from our own experience and from the experience of other countries that financial headwinds like these take years to abate.

To offset those headwinds, fiscal authorities have stepped forcefully into the breach, putting in place a massive stimulus effort. They have done so with the intent of limiting the damage to disposable income from unprecedented declines in wage and salary income—while trying to goose up capital expenditures on infrastructure.

If you go back to the rudimentary formula taught in high school economics to account for the makeup of GDP—consumption plus investment plus government expenditures plus net exports—the “G,” or government, variable is receiving enormous emphasis, while “C” is flaccid, “I” is hesitant and net “X” is tentative. At the present rate, federal, state and local authorities are expected to spend, net of intragovernmental transfers, $5.4 trillion in 2009—just under 40 percent of expected GDP.

The problem is that government stabilization measures come with a real long-term price tag: higher tax rates, greater national indebtedness and the prospect of higher interest rates driven by the government’s issuance of debt. These long-term costs of a larger government limit the American people’s willingness to rely on the public sector to drive overall economic growth. A fiscal gag reflex ensues, and the public-sector option looks less and less attractive as anything other than a temporary source of growth.

The major challenge facing U.S. fiscal authorities is meeting the need for near-term economic stimulus while pursuing a practicable plan to stabilize the government’s debt-finance obligations. The Secretary of the Treasury is doing his level best to reassure investors—both overseas and here at home—that the programs put in place by the Obama administration will work their magic and then be gradually withdrawn as the economy gets back into stride. But this is no simple task. It is now common knowledge that deficits are growing at $3 million per minute and will accumulate to some $9.1 trillion over the next decade.

And our fiscal predicament is compounded by the embedded unfunded liabilities of Social Security and Medicare. By our calculation at the Federal Reserve Bank of Dallas, the present value of the unfunded debt of these two entitlement programs has reached $104 trillion, with $88.9 trillion of that due to Medicare alone.

Q3 2009 Korpacz Investment Market Survey - Results

Observations in this quarter's report include:

· The latest survey shows investors are frustrated that more opportunities have not presented themselves.

· “Despite a still-struggling U.S. economy, ill credit markets, deteriorating property fundamentals, and precipitous declines in commercial real estate values, only a handful of quality distressed assets and forced sales have occurred thus far in 2009”.

· Some survey participants speculate that this situation will change as the for-sale market is swamped with properties underperforming and unable to be refinanced.

· Opportunities are expected to come from both securitized debt (primarily CMBS) and traditional lenders.

· Many investors believe banks are playing the “pretend and extend” game with the hope that capital reserves will be replenished and a recovering economy provides a floor for real estate values.

· Asset management and value preservation remain a focus for many believing the opportunity to purchase distressed real estate will be here for a while.

This quarter’s Korpacz survey reflects a high degree of frustration by investors that more deeply discounted real estate has not hit the market. Lenders appear to be very reluctant to dispose of non-performing loans and instead are playing for time. Abundant cash is poised and ready to be deployed but very few opportunities have so far materialized. Efforts by the Federal Reserve, Treasury and regulators are all providing a degree of stability and pushing back the growing wave of defaults and foreclosures. This is forcing buyers to be patient but could also signal a change in the way events unfold in the coming months.

So much for free trade

Please, lets not start a trade war, especially with China.

Yahoo:

Obama to impose tariffs on Chinese tires

WASHINGTON (AP) -- President Barack Obama on Friday slapped punitive tariffs on all car and light truck tires entering the United States from China in a decision that could anger the strategically important Asian powerhouse but placate union supporters important to his health care push at home.

Obama had until Sept. 17 -- next week -- to accept, reject or modify a U.S. International Trade Commission ruling that a rising tide of Chinese tires into the U.S. hurts American producers. A powerful union, United Steelworkers, blames the increase for the loss of thousands of American jobs.

The federal trade panel recommended a 55 percent tariff in the first year, 45 percent in the second year and 35 percent in the third year. Obama settled on slightly lower penalties -- an extra 35 percent in the first year, 30 percent in the second, and 25 percent in the third, White House press secretary Robert Gibbs said.

"The president decided to remedy the clear disruption to the U.S. tire industry based on the facts and the law in this case," Gibbs said.

By taking "this unprecedented action, the Obama administration is now at odds with its own public statements about refraining from increasing tariffs above current levels," said Vic DeIorio, executive vice president, GITI Tire (U.S.), the largest manufacturer of tires in China.

The decision comes as U.S. officials are working with the Chinese and other nations to plan an economic summit of the Group of 20 leading rich and developing nations in Pittsburgh, to be held Sept. 24-25. China will be a major presence at the meeting, and the United States will be eager to show it supports free trade.

Whoa, if you took these reports at face value, you might think everything is OK,

Checking the news as I usually do and this little tidbit got my attention right away.

US Trade Gap Widens on Record Import Surge

Holy moly!, this is what I have been waiting to hear, since the industrial space I work with is heavily tied to imports.

WASHINGTON (Reuters) - The U.S. trade deficit increased the most in more than 10 years in July as rebounding consumer demand led to a record increase in imports, a government report showed on Thursday.

The trade gap expanded 16.3 percent in July to $32.0 billion, the biggest month-to-month increase since February 1999.

Imports leapt a record 4.7 percent on improved U.S. appetite for foreign cars and consumer goods and on higher oil prices, which rose for a sixth consecutive month.

But what report are they referencing?

As far as I can tell, it is from the Census department, in a joint effort with the BEA, their monthly press release for September. (I did not know they did these, but I will be checking it out monthly, I added it to my calendar!).

Here is the most current one.

The thing everyone is freaking out about is highlighted in red, that in July imports increased over exports and the trade deficit widened.

Why did this happen?

The June to July increase in imports of goods reflected increases in automotive vehicles, parts, and engines ($2.4 billion); consumer goods ($1.7 billion); industrial supplies and materials ($1.4 billion); capital goods ($1.3 billion); and other goods ($0.2 billion). A decrease occurred in foods, feeds, and beverages ($0.1 billion).

I will be taking a look at the port activity that will be reported in the next few days for July. I am thinking that this was probably a one time thing, that dealers are rebuilding their depleted inventory of cars and car parts.

A 1.7 billion increase in consumer goods looks promising, but how much of that should we have expected from the peak season we are now in, as retailers start building their Christmas inventory?

We will see, I am hoping these are signs for the much anticipated inventory correction everyone keeps talking about. I am not sure what effect that will have on warehouse demand.

I speculate that since a lot of these buildings are under-utilized as it is, people will be more likely to simply put their goods on the second rack rather than lease out more space.

Kinda like how when the "recovery" happens, you will see people stop getting furlough before they hire anybody new.

Invisible & Exploited?

The average warehouse worker in the Inland Empire makes more than the average warehouse worker in LA or Orange County. I have made this point before, but here it bears repeating.


Red are my comments


LA Times:


L.A.'s warehouse workers: invisible and exploited
Toiling in obscurity, L.A.-area warehouse workers endure harsh conditions and unfair wages.


Los Angeles has long been a place where it's easy -- dangerously easy -- to labor in obscurity. Just ask any of the 90,000 workers employed at the immense warehouses of Ontario and Fontana, where more than half the goods unloaded at L.A. and Long Beach harbors are trucked, sorted and sent on their way to Wal-Marts, Targets, Home Depots and the like for a thousand miles around. (Trucking distance is usually 400 to 600 miles, if you are going a thousand miles you are probably going to travel by train).


The warehouses are a key switch-point in our new global supply chain, the place where Asian production meets American consumption. (Retail locations are where consumers get their first contact with Asian goods, the wholesaler do not in fact sell to the public).


Globally important though they may be, and even though they employ the largest concentration of private-sector blue-collar workers in Southern California, the warehouses are all but invisible.
(This is true, transportation accounts for around 1 in 7 of every job in California, but not all of them are warehouse workers).


There are no signs on their exteriors, just gray or white windowless walls on the boxlike behemoths (some of them comprising more than a million square feet) abutting interstates 10 and 15 as they traverse the Inland Empire. (This is also true, most of the windows on the outside of these buildings are fake windows to break up up the box look. There are some windows in the office portion of the warehouse, but they are usually less than 5% of the total space of the buildings.)


The only way to identify the buildings is by the trucks parked at their loading docks: The one with 200 Wal-Mart trucks is a Wal-Mart warehouse. But so far as its workers are concerned, it isn't. The retailers usually don't own the warehouses (they're owned by commercial property companies) or operate them (they're operated by logistics companies). (This is also true, most retailers do not want to own these buildings, since they make more money off their business than in real estate appreciation. However, a good portion do own their building, or will have a building built for them.)


And neither the retailers nor the property companies nor the logistics companies employ most of the workers. (This is also true, most of the labor is temp labor, allowing the logistics companies flexibility, which is their greatest asset.)


Though many have worked full time in the same job for years, a majority of them are actually employed by one or another of the 270 temp agencies that dot the local terrain.


Fontana and Ontario have become company towns in which the companies whose goods are being handled disavow any responsibility for the conditions in which tens of thousands of largely immigrant warehouse workers toil.


At its best, warehouse work is fast-paced, risky and hot (many of the warehouses lack air conditioning, and temperatures inside can rise to over 100 degrees in summer).


(This is also true, however, the office portion will usually have air conditioning. The buildings are made of concrete, and are highly energy efficient, so they are slow to heat up.)


"If people have to go to the bathroom, they have to wait until the break," a worker named Homero, who loads trucks in an area warehouse, told me in May. "If people get sick, they have to stay on the job."


The temps -- even if their jobs are functionally indistinguishable from those of full-time employees -- get no benefits and make little more than minimum wage. A complaint that the Change to Win labor federation (which has been endeavoring to organize these workers) has filed with the Labor Department documents a wide range of alleged abuses to which workers at dozens of warehouses have been subjected, including being compelled to work extra hours either for no overtime or for no pay at all, and being ordered not to report on-the-job injuries to government agencies.


The temp system at the warehouses is exquisitely calibrated to keep the supply chain fast and cheap -- and to protect retailers from the legal liability that comes with being an employer of record. As Edna Bonacich and Jake B. Wilson have documented in their 2008 book, "Getting the Goods: Ports, Labor, and the Logistics Revolution," the temps in one retailer's warehouses -- and this was before the economic downturn that devastated the Inland Empire -- were paid just $8.50 an hour when hired, though some could eventually work their way up to $12. The full-time workers employed by the company made about one-third more than the temps


The descent of Southern California warehouse work to the level of temp exploitation is relatively recent -- a consequence, chiefly, of the torrent of Chinese imports sped through the region by mega-retailers such as Wal-Mart, which have the power to force wage reductions all along the global supply chain. As Bonacich and Juan David de Lara documented in a study released this February, temporary employment in the Inland Empire grew by a stunning 575% from 1990 to 2007.


Blue-collar L.A. has never had the prominence of blue-collar Detroit or blue-collar Chicago: "The industry" in Los Angeles means show business. Even when Los Angeles was the second-largest producer of cars (the auto factories all closed in the 1970s and '80s) and the epicenter of aerospace production (the defense plants shuttered or scaled way back at the end of the Cold War), L.A.'s blue-collar world might have been on another planet for all that millions of Angelenos ever saw or thought about it. Los Angeles is so vast and segmented that it has long been more invisible to itself than any other American city.


But even by L.A.'s standards of blue-collar invisibility, many warehouse workers in the Inland Empire labor in profound obscurity -- off in a corner of greater Los Angeles, in unmarked mega-sweatshops, working long hours for temp wages with none of the rights of full-time employees.


On Labor Day, we need to acknowledge both their existence and the value of their work -- and support their efforts to get decently paid for it.


(The work is not glamorous, but for the most part it is safer and more consistent than construction or agriculture, which are some of the other blue-collar jobs here in the IE. One of the concerns that businesses have when looking at this region is the labor pool. There is a stigma attached to the IE, and many employers are concerned about stable labor. Many cities have employment vouching programs where they will drug test and pre-screeen applicants, but all this is taken care of when you use the temp labor.

I am not sure if painting these companies as villains is accurate, since they are providing jobs, paying taxes and cities go to great lengths to have them move here, since the employment options for the IE are limited.)

Residential this time around

Here is this months article: http://www.sbsun.com/business/ci_13283662

Thanks to Meagan who wrote it and let me take credit for everything.

Housing rebound? Not yet

Home prices nationally are on an upswing in the second quarter of 2009, according to the S&P/ Case-Shiller home price index. This is because the national index reported its first positive quarter-to-quarter increase in more than three years, meaning that home prices for the nation as a whole are starting to rise - a sign of light at the end of a very long tunnel.

But that light may be just barely flickering, and even on its way out.

A government program that offers first-time home buyers $8,000 is set to expire by Nov. 30 of this year. This program has effectively been pulling home sales demand from next year into this one.

Bruce Norris of The Norris Group, an Inland Empire real estate investment company, also has a warning about reading too much into rising home prices. Multiple offers on listed properties would normally drive prices up, but "this time it is a completely false indicator due to foreclosure moratoriums artificially lowering inventory." Though buyers are plentiful now, the supply of houses is set to inflate, putting downward pressure back on home prices.

Once we wade past the soundbites (" ... the overall number of existing home sales rose 7.2 percent in July from June, the National Association of Realtors reported. It was the largest monthly gain since the group began tracking existing home sales in 1999."), we are confronted with not only a surplus of foreclosed or soon-to-be-foreclosed homes not yet on the market, but also with option ARMs (adjustable rate mortgages).

These ARMs have payments set to be recast upward beginning in the fall of 2010, peaking in the third and fourth quarters of 2011. These types of mortgages were written between 2004 and 2008 and feature "pick a payment" options. Typically a 30-year loan, option ARMs initially offer the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment and a 30-year fully amortizing payment.

For example, on the 10th month of its fifth year, an option ARM's monthly payment could jump to 2 1/2 times the original minimum payment amount. With property values continuing to drop and unemployment rates continuing to rise, it is unlikely a family faced with an underwater mortgage and an adjustable rate about to balloon will keep making, or be able to make, the mortgage payments.

Asked what would help the market correct itself, Norris advocates "Lenders unloading the inventory, allowing investors to buy and repair the properties." Loan modifications, Norris continues, "have proven to be unsuccessful as they go back into foreclosure over 70 percent of the time."

How have things changed in the past eight months? Norris says "buyers have come out and are once again interested," however, there are obstacles.

"At the top of the list is that the appraisal process is broken," he says. "It used to be that a property appraised at approximately what a willing buyer and seller agreed to. That is the definition of market value. Now, their decision is constantly being trumped by an overzealous appraisal process; mostly driven by automation."

As of May 1, the Home Valuation Code of Conduct was amended to state that brokers and real estate agents could no longer order appraisals. All orders must come from lenders. As it is impossible for national lenders to maintain a database of appraisers in each market, the automated appraisal system has flourished. Web sites do "pre-appraisal appraisals" based on formulas and codes.

"This automated system does not know how to distinguish between a vacant property needing work and a perfectly repaired house," Norris notes.

Though on the surface it looks like the housing crisis is slowly bottoming out, many pressing issues still need to be resolved: lenders dragging their feet in filing foreclosures and modifying mortgages, an appraisal process constantly being tinkered with and short-term government programs that may have long-term consequences.

We are progressing through the largest real estate bust in history, but we are not out of this tunnel just yet.

Well, We are not quite there yet.

Manufacturing & Chemicals

Ge released its chemical production survey. Here is the report:

A chemicals and plastics rebound would generally precede a manufacturing rebound, since these are the raw materials that go into production.

Some good news, chemical production is up over the previous quarter as chemical prices have risen off rock bottom lows. Some bad news, chemical production is still lower than levels seen at this same time last year.

This coincides with the recent announcement of an uptick in the PMI to 52.9, signaling that the manufacturing sector is expanding, after contracting for the past 18 months.
Most of the increase in the PMI has been due to an increase in prices, which is taken as a sign of increasing demand. There was also an increase in new orders, finally.

Here is the release for this months PMI.

Some take aways:
Production is picking up as demand [for] orders is being accelerated." (Nonmetallic Mineral Products)
"Demand from automotive manufacturers increasing thanks to 'Cash for Clunkers.'" (Fabricated Metal Products)
"In addition to improved business come the complications of a supply chain drained of inventory." (Paper Products)
"The sudden increase in customer demand, plus the low inventories held at services centers, is causing a shortage in the supply of raw steel." (Transportation Equipment)
"[It] appears customers' inventories are getting low, and they are cautiously placing orders." (Apparel, Leather & Allied Products)

Toyota Closing NUMMI Plant in Fremont

Market Watch: I wonder how many local LA Basin jobs will be lost, how many small parts manufacturing companies will be lost.

The Nummi plant employs about 4,600, most of them represented by the United Auto Workers.

Friends of Nummi, a group that has been fighting to keep Nummi open, said the plant receives supplies from about 1,000 companies throughout California. The group estimates about 50,000 California jobs are tied to the plant.

The plant's future has been hanging in the balance since June, when General Motors announced it was ending its 25-year, 50-50 joint venture there with Toyota.
GM's decision to exit the venture was part of the struggling Detroit car marker's effort to shrink operations as it went through bankruptcy restructuring earlier this year. GM's last model to roll out of the Nummi plant was the Pontiac Vibe. GM, as part of its downsizing, is phasing out the Pontiac brand.

Congats Robert Sammons!

Fellow Researcher in New York City on Bloomberg.

FYI there is more office space in NYC than there is industrial space in the West Inland Empire, so I do not envy the market he has to cover.

Still open for debate is which market is worse: High-rise empty office buildings for imploded Wall-Street firms, or, empty mega-distribution centers overly dependant on foreign imports.

Ports of LA / LB Face a Grim Future

Port statistics came out today for LA / LB. This is volume for July.

Los Angeles: 305,226 inbound, 138,269 outbound. This is down -2,3% over the month, -17.5% over the year.

Long Beach: 221,719 inbound, 108,420 outbound. Up 4.8% over the month, down 23% over the year.

Combined, volume is up 4.6% over the month, down 20% over the year.

This is the start of the peak season, so seeing LA being down over the month brought a little tear to my eye. The decline in imports has been slowly receeding at LA, so slowly receeding that it might not look like any improvement at all.

Seeking Alpha has a pretty grim outlook

And to add insult to injury to the state which is bankrupt in all but name and continuing to pay with IOUs, the future before the port complex is looking bleaker by the day as seaborne traffic may gradually shift completely away from the harbors, which are among the primary economic drivers for this Top 10 global economy.
But sluggish recovery from the recession isn't the only thing that threatens the amount of business at the two ports.The report said that a larger number of freight shippers will prefer to move more cargo via a wider Panama Canal channel that is expected to open in 2014, bypassing the Southern California ports' rail connection for moving freight to other parts of the U.S.

...

Among the report's many points is that this recession is far more complicated than the economic downturns following the dot-com bust and the 9/11 terrorist attacks, after which pent-up consumer demand rather quickly returned the economy to relatively normal levels.This time, no such pent-up demand exists. Instead there has been a fundamental lowering of financial capability, according to the report, produced for the ports by consulting firms Tioga Group and IHS Global Insight.
The report tracks with what economists at the Los Angeles County Economic Development Corp. have been predicting and leads experts there to question whether international trade "will be the big engine of growth that it once was" for the region.

Rose Friedman, Economist Partner of Husband Milton, Dies at 97

Bloomberg:

LOL WUT? (CRE debt & Distressed Mischief)

From REIT Wrecks: http://www.reitwrecks.com/2009/07/mortage-reit-ipos-vibrant-life-after.html

Mortgage REIT IPOs: There is Vibrant Life After Death in CRE Debt

In just the past two months, 8 Mortgage REITs have filed to raise $3.9 billion in fresh cash, which should not be all that surprising. Retail financial advisors are saying that buckets of high net worth cash are sitting on the sidelines, waiting for opportunities in distressed commercial real estate. With several REIT follow on offerings up 150 percent so far this year, the public market is clearly betting on a turn around. Indeed, back in May, it appeared that the 52 week lows for REITs had already come and gone. Investors are now feeling safe enough to travel even farther down the curve and back into CRE debt, and a slew of new Mortgage REITs are emerging to greet them.Ladder Capital is the latest aspiring Mortgage REIT, with plans to raise raise $400 million to invest in distressed whole loan mortgages.

Ladder Capital Realty Finance (LCRF), as the new firm will be known, will primarily target first mortgage originations as well as senior participations in fixed and floating first mortgage loans.

Regulatory filings indicate that LCRF may also originate and acquire CMBS using TALF money, invest in some B-note and mezzanine loans, as well as provide financing for third party purchases of CRE notes and first mortgages.

And you wonder how we got into this mess in the first place. The Ponzi Scheme perpetuates itself with people buying and selling shares of the previous, old & busted Ponzi Scheme.

A regional sourcing strategy? In my supply chain network? It is more likely than you think.

Greater disparity in labor wages + low transportation costs = longer supply chains = bigger distribution centers = hubs servicing half the continent = good for the Inland Empire

Weak American Dollar + high fuel prices = shorter supply chains = local suppliers + regional warehouses = bad for the Inland Empire

From the FT:

Manufacturers are abandoning global supply chains for regional ones in a big shift brought about by the financial crisis and climate change concerns, according to executives and analysts.

Companies are increasingly looking closer to home for their components, meaning that for their US or European operations they are more likely to use Mexico and eastern Europe than China, as previously.

Trade Makes The World A Better Place

My high-school economics teacher, to which I am in a large part indebted as he spurred my creative interest in the subject, used a number of games to teach economic principals.



One of these games involved giving each student a bag of trinkets, paper, pencils, gum etc.



He then instructed each student to write down the value of what they believed the objects were worth. He also told them to quantify on a 1-to-10 scale how much they wanted the objects.



In the next step, students could trade their items. It was very informal, there were no auctions or formal trading routes, you just walked around seeing what everyone else had and struck up a deal if it interested you.



The last step was to have the students estimate how much their new possessions were worth and rate on a scale of 1-to-10 how they felt about their new items.



To every ones surprise, they now had more than they started with.



This was a powerful demonstration that people will trade only when it benefits them. Trade creates wealth.



I thought of this example as I stumbled upon an economics paper that seeks to estimate the impacts of increased trade in India. Here is the link.



The author looks at railroad construction in India and a very detailed dataset and comes to the following conclusions:



1. Railroads reduced trading costs in India.

2. Railroads increased trade flows.

3. Railroads reduced supply shocks, prices did not fluctuate as greatly as before.

4. Railroads increased real income

5. Railroads decreased income volatility

6. Railroads paid for themselves.



The author utilized some pretty clever tools in his paper to ensure accuracy. Since building a railroad is not a random process you had to tweak the process a bit, otherwise you will draw conclusions from a biased premise. To get around this, the author examined areas where railroads were actually built, and compared growth to areas where railroads were supposed to be built, but were not.

In this way, you are more accurately comparing apples to apples.

A good read.

When does 2/100th of an inch equal $1,000,000?

Seattle Times:

A small mistake at the Port of Seattle is going to cost a lot, perhaps about $1 million. The problem is 2/100ths of an inch, and it delayed the opening of a celebrated project by two months.
The Port constructed a new cargo terminal on the Seattle waterfront and dug a trench to hold the electrical cable for cranes that lift containers from ships.
The new trench, built by contractor BergerABAM, is narrower than it should be, so the cable doesn't fit.
"Clearly the contractor should've built the trench at 2.52 inches and it's 2.5," said Port Commission President Bill Bryant.

Yes, clearly.

SSA will pay $20,000 a day in rent to the Port once its 30-year lease kicks in, Port spokeswoman Charla Skaggs said. But that amount is for both Terminal 30 and adjacent Terminal 25.

When SSA couldn't power the cranes, which serve both terminals, it argued the whole area was rendered unusable.

At $20,000 a day in rent, there had better be some cranes. And some power to go along with it.

I had no idea terminals rented for so much. This may explain why the Ports of Los Angeles and Long Beach are such cash cows. And it also explains why ship operators want to load and unload as many ships as possible, it is too expensive to do this inefficiently. This doesn't cover the cost of wages, insurance, fuel etc.

Big business, small mistake.

Retail in The IE

Our new retail manager, making waves!

Here is the URL to the video.
http://business.inlandsocal.com/?nvid=378772&shu=1

Guess whose numbers are in the freaking Wall Street Journal?

PHOENIX -- Along a 15-mile stretch of desert, amid strip malls and unfinished subdivisions, nearly a dozen giant warehouses sit silent and empty. They are relics of this city's dream of becoming a national warehouse hub, a
vision dashed by plunging imports and a reordering of the nation's biggest ports.

Decisions to site these warehouses were made earlier this decade as Americans were buying so many new cars, televisions and T-shirts that California -- the gateway for many Asian imports -- was running out of cheap storage space. With cash from pension funds and other investors, developers sought to turn the desert on the city's west side into a distribution hub, 370 miles from Los Angeles ports.

Oh, oh my god. We are having a tough enough time getting people to move 60 miles from the Ports of Los Angeles. 370 miles, really?

370 miles? 370 miles?

We have 25%+ vacancy rate with over 6 million added each year for the last 2 years.

If you have ever been to the Inland Empire, you realize that you don't have to go ALL THE WAY TO PHOENIX to find some vacant land.

In Phoenix, developers face headwinds beyond the drop in global trade. Shippers are increasingly turning to ports in Georgia, Virginia and Florida to transport goods bound east of the Mississippi, while space in the Inland Empire -- much closer to Los Angeles -- has become abundant.

"Instead of being the beneficiary of its location between Southern California ports and the East, Phoenix has become the victim," said Jeff Shell, head of corporate finance for real-estate brokerage Grubb & Ellis Co.

Feeding the commercial space boom were publicly traded real-estate investments trusts and private-equity funds that funneled cash from pension funds, endowments and other investors.

From 2001 through 2008, some $5.6 billion in industrial property deals were done
here, according to Real Capital Analytics Inc.

In a 2005 deal, Mr. Czerwinski paid $14 million for 300 acres of land 25 miles from Phoenix. Three months later, he sold the parcel for $24 million to a California developer, Voit Real Estate Services. Voit held on to the land for about a year before selling it to Duke

Realty Corp., an Indianapolis property company, for $36 million.

Duke Realty and SunCor Development Co., a subsidiary of Phoenix energy giant Pinnacle West Capital Corp., are among the developers stuck with big chunks of empty space. In Goodyear, 25 miles west of Phoenix, SunCor's year-old, 400,000-
square-foot warehouse features palm trees and rustic architecture but no tenants.
At the height of the frenzy, Phoenix brokers said, investors agreed to buy an empty warehouse for more than it cost to build it.

That is how LBA Realty, an Irvine, Calif., investment firm, ended up paying a reported $73 million for a four-building, 1.1-million square-foot complex early last
year.

And it is how ING Clarion Partners, the New York real-estate-investment unit of Dutch financial giant ING Groep N.V., ended up paying $44 million for a new, 700,000-square-foot complex around the same time.

Things like this make me think that at its heart, real estate is a giant Ponzi scheme. The music stopped and suddenly we realized we didn't have enough chairs. We didn't even have chairs, we had empty boxes 370 miles from anyone who cares. Each one a headstone to an ill conceived notion of endless greed and speculation.

Cheap money is a poor foundation for any viable business; strange things are allowed to grow when the normal constraints of economic reason are not applied.

What foundations am I talking about? The notion of scarcity. Leverage allows you borrow other people's money and take risks as if the money is free and without cost.

But money is in fact a scarce good, it does have a cost and it needs to be paid for. Leverage is great on the way up, but it burns on the way down.

And that is what we are stuck with today.

We don't sell buildings anymore, we deal in notes

One of the topics that has been coming up, over and over again to the point where one is forced to start paying attention, has to do with debt.

Real estate is a peculiar beast, in that what we are offering is really, really expensive and most buyers do not have the cash on hand to purchase these buildings.

If these entities do have the cash on hand, they could leverage this amount by borrowing more.

Few people buy real estate with money they actually have, but rather they buy real estate with money they will have, or think they will have, at some point in the future.

There tend to be a few exceptions and you can spot them because they are the ones who are not bankrupt, and not about to be bankrupt, are not hurting to the extent that someone with a maturing mortgage loan with a parade of creditors would be.

These people own their buildings, do not plan to sell and do not really plan to buy unless it is an amazing deal. You are not going to see, in my opinion, a lot of activity from these boring long term investors. They got to where they were by not being greedy or fearful and they will not be sold unlike all the suckers playing with someone elses money.

This second group of people, the suckers, they don't own their building anymore. It is going to the bank or whoever lent the money in the first place. The problem is that it will be difficult to figure out who will actually own these buildings, mainly for the same reason that the whole sup-prime mess will take a long time to sort out. There is no clear-cut owner, frequently it is a bunch of people who never met and who don't really want to own or operate a building.

If you can find these people and get them to sell you their partial interest in a building, and offer them some reasonable number above 0 for their shares, you could, in theory, buy a building indirectly on some shadow real estate market that is not monitored by anybody.

This has come up a number of times. Mostly because brokers want to get in touch with the people at the bank or they want to know who owns what on a particular parcel.

Since rents are down and vacancy is up, the margin calls will continue and bankruptcies will increase. This secondary behind the scenes loan market will get bigger.

Here is a piece on the extend of the coming tidal wave of defaults.

Perhaps this shadow market will have its own shadow bubble as more and more people pile into the unknown. But people are asking for this info and there is not an easy or cheap way to obtain it. Which means that brokers can be the gatekeepers again, but who knows if they will be "real estate brokers" or "finance / investment brokers" the lines are getting blurred.

Obama Beer Summit

The following has little to no relevance to the Inland Empire, industrial real estate or economics.

But it does shed some light on beer and how it changes the world.

While I commend Obama on raising beer awareness globally, I am not sure if I agree with the political grandstanding and the message the choice of beer sends.


Obama Beer Summit Choices Make For A Happy Hour

By choosing beer for the meeting instead of, say, a Washington state pinot noir or a summery gin and tonic, what was the president trying to telegraph?

I'd say he's attempting to cater his appearance to the everyday layperson throughout Middle America. Beer is one of the oldest alcoholic beverages in the world, and the oldest and most popular in the United States. Most of the rebel meetings of our Founding Fathers were based around a pub, or a big tub of beer, and many of them brewed beer on the side. Many of the world's most important — and maybe some of the worst — decisions were probably based around a glass of beer.

Can you tell us what the beer choices for the summit might tell us about the quaffers? (For Obama: Bud Light, owned by Belgian beverage giant InBev; for Gates, Red Stripe, Jamaica-brewed and owned by premium drink behemoth Diageo; and for Crowley, Blue Moon, owned by MillerCoors.)

They're all really session beers — a description that originates in Britain. They're the kind of beers drunk when a bunch of mates sit down and drink pint after pint after pint of light, refreshing beers. Session beers are meant to be drunk in quantity — they don't fill you up and can be drunk without too many deleterious effects. Maybe President Obama and Professor Gates want to project something that appeals to the masses, but the officer is probably drinking simply what he likes.

And the beers?

Bud Light is considered a "lawn mower" beer, perfect for after mowing the lawn or when you get home from work. It's one step up from a nice, tall glass of ice water and generally one of the lightest pale lagers made in the United States. Red Stripe is also a pale lager, but it's an official handmade product, with a little more flavor and flair. And Blue Moon is also mass-produced, but it's an ale. It's a more flavorful beverage, with some floral character and hints of coriander and orange peel. None of these are microbrews or craft beers, but the closest is Blue Moon, a tasty beer that's a macrobrewer's attempt to join the craft beer market.

AMB Q2 Earnings Report

Can be found here:

Some highlights,

Before we review the quarter's highlights, I'd like to go over the major drivers of global demand for industrial real estate. In order of importance, the top five of these include global trade, global GDP, industrial production, business inventories and consumption

...

Today we see unmistakable signs that we are moving closer to the inflection point in the cycle. The record declines that we saw in the global economy and global trade during the first half of the year are clearly moderating. For example, the decline in container traffic through major ports is slowing down. Since bottoming in February, year-to-date port container decline has moderated in each of the four months ending in June.

This is also true for air cargo volumes, which hit their cyclical lows in February and have declined less on a year-to-date basis for each of the subsequent months through May, the last reported month. While we're encouraged by the improvements in these trends, we acknowledge that there are off record lows and have yet to turn positive.

There are also early signs that some rebuilding of inventories has begun. For example, leading indicators of industrial production, precursors to trade growth have been on the rise in the US and are beginning to expand in many countries including Germany, France, Singapore, Korea and China.

Retail sales in China have continued to grow about 15% year-over-year. We believe the Chinese consumer will play a significant role in the global recovery. As you all know in the US, retail sales have improved four out of the six reporting months through June.

Our customers are also sending positive signals. Sentiment and traffic through our properties are improving, customers tell us that they feel the economy is touched or is close to touching bottom. Decision making has begun to ease.

Ripple Effect From Slowdown at Ports

It pays to have your quarterly numbers come out first. The news media is hungry and sometimes all you have to do is answer the phone. Oh, and have a top-notch research department, that helps too

Ripple Effect From Slowdown at Ports

The recession hit the vast South Bay and Mid-Cities industrial markets hard last quarter as companies in the area that serve the region’s twin ports either pressed for lease deals, closed shop or consolidated operations.

Vacancies increased more than one point in Mid-Cities to 3.1 percent – the most dramatic increase of all Los Angeles County industrial markets – while the South Bay vacancy rate increased three-tenths of a point to 2.7 percent. Driving up the vacancy rate was a sharp slowdown of activity at the ports that not only affected tenants but rattled landlords as well.
“We are seeing short-term renewals, which is a combination of companies waiting out and landlords not wanting to grant long-term renewals at depressed rates,” said Alex Blecksmith, an associate at Colliers International. “But for the sake of keeping
occupancy, landlords are conceding at 12 or 18 months.”

One example is Medical Depot Inc., a distributor of medical supplies, which signed a lease renewal on Rosemead Boulevard in Pico Rivera at 52 cents triple net – for just one year. What’s more, brokers said tenants looking to strike deals with landlords are requesting rent reductions as they seek to cut costs where they can. Consequently, asking rents dropped from 57 cents to 51 cents in Mid-Cities and 64 cents to 62 cents in the South Bay.

But cheaper rent rates may not be enough to keep tenants locked in. If the recession doesn’t turn around soon, brokers said tenants could begin moving operations to cheaper markets, such as the Inland Empire.

Industrial Markets At a Glance:

Inventory: 325 million square feet

Under Construction: 570,241 square feet

Asking Rents: 62 cents (South Bay); 51 cents (Mid-Cities)

MAIN EVENTS
- Acco Engineered Systems purchased a 150,000-square-foot industrial building for more than $15 million from Joseph T. Ryerson & Son Inc. The building, at 6446 E. Washington Blvd. in Commerce, is the 11th location for the Glendale mechanical engineering firm. Acco plans to use the space for its fabrication, warehousing and distribution needs.

- CAN Transport, owned by Amco Distribution Services Inc., signed a 50,000-square-foot lease at 23803 S. Wilmington Ave. in Carson. Landlord Watson Land Co. modified the space, tearing down an office section used by the previous tenant. The property features a large parcel for the company’s trucking operations. The deal represents a consolidation for Amco, which moved from a 177,000-square-foot building also in Carson.