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.
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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.
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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.
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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)