Where Downward Pressure On Rents Comes From

From NREI:

The era of rapidly rising office rents that dominated the booming property markets in 2006 and 2007 has reversed course, giving tenants the upper hand at the bargaining table. In fact, New York-based research firm Reis expects a 7.4% drop in effective office rents this year after growing only 0.3% in 2008.

U.S. companies shed more than 4.4 million jobs between December 2007 and the end of February, according to Bureau of Labor Statistics. That has helped push the office vacancy rate to 14.5% in 2008 from 12.6% in 2007, according to Reis, which tracks 79 office markets in the U.S.

In 2006 and 2007, office rents grew 9% and 10.6%, respectively. Aware of the crumbling fundamentals, tenants are renegotiating virtually every lease deal that has been in the pipeline since last summer, brokerage executives say.

New York-based tenant rep Studley, for example, started working with a client midway through last year and initially anticipated a lease rate of $50 per sq. ft. The client recently signed for $28 per sq. ft., says Michael Colacino, president of the brokerage, who declined to name the tenant.

“It’s a harsh landscape, and if it wasn’t for the larger, gloomier context of the entire U.S. economy being troubled, I think people would take it a lot more personally,” he says. “But falling markets equal price discovery, and re-negotiation is the red-headed stepchild of price discovery.”

James Garibaldi, president of Chatham, N.J.-based service provider Garibaldi Group, says that office tenants are acting increasingly like retailers, who for several months have pressured landlords to renegotiate leases or downsize their space.

Garibaldi and other brokerage executives add that office tenants increasingly are delaying lease decisions. Uncertainty about the timeline for economic recovery is one reason, but tenants are also betting on further rent deterioration.

Ultimately, however, the lion’s share of tenants are choosing to renew rather than move, says Garibaldi, who is beefing up his tenant rep business.

“The decision process has become as excruciatingly long as any time in memory,” he adds. “Landlords have become increasingly aggressive, making for a far more competitive arena.”

Inland Empire Office Market In The Press

Pretty good article here from the Daily Bulletin

It all came together rather nicely to give an impression of what is going on and I am glad that the other commenter's in the article all agreed on the proper state of the market. It just means that the denial stage is over, and now the healing can begin.

As a researcher, I usually do not take it upon myself to sugarcoat everything and I hope my audience appreciates it.

What I see when I run the reports is a macro picture, there are a lot of little stories and individual players that all interact, and I only see a little snapshot.

This article was talked about in the Housing Bubble Blog, which tracks conditions across the country. So my snapshot is being put together with other snapshots to get a feel of the condition of the whole market.

Commodity Prices Take A Hit

From Purchasing Magazine:

Fewer things are being mined as the world works throughs excesses supply. When prices increase again, it is a sign that demand has returned and a recovery is on the way.

Pulse Of The Ports Recap - Part 1.

Hello, the 5th annual Pulse of the Ports forecast was this Wednesday and I finally allotted some time to discuss all the information that was presented. This year, the whole event was videotaped, but I have not seen it on their website yet http://www.polb.com/ so keep a lookout for that.

There is a lot of material here, so I will be breaking it into 2 parts.

Here are my notes and commentary about the event.

James Hankla, President of the Long Beach Board of Commissioners, started off by setting the tone of the event. There was an 11% decline in port volume last year, the sharpest decline in 20 years. With the decline in port volume, so goes jobs & businesses and Southern California needs an economic rebound and they need it quick.


I was actually pretty surprised that he came right out and said it. I was expecting him to pussyfoot around, talking up the ports green initiatives in order to deflect the economic question. I respect the man who can put business before politics.


Richard Steinke, the executive director of the Port of Long Beach, gave a brief history as to why this event was held in the first place. In 2004 cargo piled up suddenly and there was not enough workers or equipment to unload the vessels. Ships were waiting a week and this one event has tainted the port with the belief that it was congested. To combat these perceptions, they began offering these public meetings so nobody is caught off guard again.


The first speaker was Dr. Joseph Magaddino, Department Chair of Economic, Cal State Long Beach.


First we started with an overview of the recession, which started in December of 2007. What we are seeing is a global contraction of wealth, with the developed world in recession and the developing world seeing a much slower rate of growth. Global GDP is estimated to be down 0.5%, and marks the first time the entire world was in contraction since 1945. Already the situation we are in is a the longest recession in history.


Consumer confidence is the lowerst it has even been. 11 trillion in wealth was destroyed in this affair as home values and stock values have plummeted. Consumers are retrenching and consumption is down.


Part of the problem is that 1/2 of the goods consumed in the United States are imported. As American consumers cut back, we are essentially exporting the recession to our trading partners who came to depend on our high levels of consumption.


This global weakness has caused everyone to want to hold American dollars, since that is seen as the safest asset. Since oil is priced in dollars, the price of oil has plummeted as the dollar gained in strength.


The problem he sees is with the Federal Reserve creating liquidity to combat the credit crunch. At some point in time they are going to have to pull that money out of the system, otherwise we will have massive inflation once the economy rebounds.


He predicts that the worst part of the recession is now, the part we are currently in. Already we have lost around 4.3 million jobs and we can expect 3 million more before things turn around. Employment lags activity, and we have not seen an increase in economic activity yet.


He expects that port activity in December of 2009 to be higher than it was in 2008, the first sign of a possible recovery.


One of the reoccurring themes that all the speakers closed with was the need to improve infrastructure during the downturn so we are geared up and ready to go once the economy recovers.


The second speaker was Dean Tracy, Lowes Director of Import Logistics.


This guy was great. After his speech he had me seriously considering taking a career in logistics.


First, some of the facts about Lowes. It is the 7th largest importer in the country. They import about 103,000 FEU's (or 206,000 TEU's). They have 1650 stores and are planning on opening up 60-70 this year. This is about 1/2 as many stores as they did in previous years.


Lowes has 15 regional DC's and 3 transload facilities. They import about 30,000 40ft containers through LA/LB. Their DC in the Inland Empire services 126 stores and their transload facility here handles 500 stores.


Lowes handles most of their own distribution, only 25% of their merchandise comes from 3rd party providers.


He had nothing but good things to say about our IE industrial buildings and cross-dock facilities. The best in the country.


He did not expect a peak season this year. With 484 shipping vessels idle there is massive excess capacity at the ports now, and we are not at the bottom.


50% of the cargo that comes through the port is discretionary (it can go anywhere in the country). Most of the cargo that comes into the IE is discretionary, and when they raise the requirements and fees at the port, it is the IE that suffers the most.


In addition to the fees that the ports have (port security fee, Pier Pass, clean truck fee, infrastructure fee, Alameda Corridor charge and container fees) there is an added administrative effort that companies need to have in order to manage and pay all these fees (the fee payment fee).


To remain competitive, POLB needs to limit their fees and make it more attractive for shippers to work here. Otherwise they will ship things elsewhere.


George Adams - Institute of Scrap Recycling


Little preface, this is the owner of a large scrap metal recycling company which has 40 locations and handles 3 million tons annually.


Since Southern California has no steel mills, we have to export our scrap. Scrap metal is used first before it will be mined, because it is cheaper to scrap it then to mine it.


Scrap metal covers 40% of the worlds metal needs. The U.S. is the largest exporter of scrap in what is a $5 billion a year industry.

His scrap business is down 30% since last year.

At its peak, scrap was trading at $750 a ton. Then it crashed to about $200 a ton. It happened very very quickly, almost it mid shipment across the Pacific. When his scrap arrived to China there was nobody to pay for it. The contraction has led to unforeseen issues, such as him expanding his operations during the good times only to cut back in the bad.

The upside is that once all this infrastructure spending takes off again in the U.S. and China, the world will need metal again. He sees more scrap being sent by containers in the future rather than by bulk.

Peter Keller - President of NYK Line, (maritime shipper).

Things are getting back to the basics. 11% of the fleets are idle. Loading in Asia is down. This is not the bottom.

The good news is that inventories are being depleted. This will cause retailers to order more goods eventually rather than working off the limited supplies they have here.

His main point was that the bust hurt his company very badly and that current shipping rates are not sustainable. The margins are too low and all members of the supply chain are feeling it. The demand for the global supply chain services is at an all time low and firms need to get productive and cut costs otherwise they will die in these leaner times.

Customers are getting champagne at beer prices, and it cannot last in the long run.

All members of the supply chain are basically each others customers, and since prices have dropped, customer service between firms is something that can be improved. For shippers, they are not in the business of building bridges, laying tracks or building warehouses. These are all issues that are individually faced my other members of the supply chain. However, these factors will influence shippers in their capacity to move cargo.

And if the ports of Long Beach and LA cannot help coordinate these efforts to improve the goods movement industry, the shippers will go someplace else.

One analogy that I appreciated was that cargo is like water, it will go through the path of least resistance to its final destination.

Next Week: Part II

IE Retail: Starbucks Is The Posterboy Of What Not To Do

From Reuters.

Of the 600 stores that Starbucks closed in 2008, 88 of them were in the Inland Empire. That is around 15%.

I feel somewhat guilty. The retail brokers that used to work here were heavily involved in pushing the power center concept to its logical extreme in the I.E. These centers are now the headstones in a retail graveyard. One of my investment broker friends is doing a presentation tomorrow at the San Bernardino Economic Summit on the retail market. Will post those slides later.

The coffee chain moved in -- and cashed in -- when high-density housing developments were springing up near highways and on hillsides in the area well east of California's famous coastal cities. Now that the party is over, Starbucks is pulling up stakes.

Starbucks' predicament offers a glimpse into fortunes of U.S. retailers, who are retrenching after easy credit fueled a consumer spending binge.

...

In 2004, on the heels of unexpected success in red-hot real estate markets like the Inland Empire -- which claims some of the nation's highest percentages of children under the age of 20 and "aspirational" consumers aged 20 to 34 -- Starbucks predicted it could rival the size of hamburger chain McDonald's Corp.

Just a few years later, the Inland Empire is best known for its leading role in the housing bust.

Pulse of The Ports Tomorrow

Has it been a year already?

The "Pulse of the Ports" peak season forecast is here already.
It is tomorrow in Long Beach.
Last years was awesome and I am expecting nothing less this year.
For a recap of last years presentation, click here.

Last year people were feeling a little blip in port pressure. Gas prices were high and transportation / supply chain was the theme.

This year, I am expecting many long faces. The theme will likely revolve around in how wrong all our previous forecasts were and how everyone is hurting because port volume is down.

There are no longshoreman representing on the panel this year, which is fine. They did not really share anything new last year.

Looking forward to the recycling bit, there are likely to be some disturbing numbers in that presentation. (FYI one of the largest exports out of LA / Long Beach is scrap).

Here is the agenda.

Peak Season Forecast "Pulse of the Ports"Long Beach Harbor Department - Special Meeting
Location: Hyatt Regency Long Beach

Experts Presenting Industry Forecasts

Dr.Joseph P. Magaddino — Chair, Department of Economics, Cal State University, Long Beach

Dean Tracy — Director International Transportation, Lowe's

George Adams — Chairman, Institute of Scrap Recycling Industries, Inc. (ISRI) and President of SA Recycling

Peter I. Keller — President, NYK Line (North America) Inc.

Elvis Ganda — President, California United Terminal

John Doherty, P.E. — CEO, Alameda Corridor Transportation Authority

Bob Curry Jr. — President, California Multimodal, LLC

"Clean truck" program at Port of LA/Long Beach handed legal setback

From LM:

LONG BEACH—In hearings staged late last week, the U.S. Court of Appeals for the Ninth Circuit unanimously held that the California lower court erred in refusing to enjoin the truck concession programs instituted by the Ports of Los Angeles and Long Beach.

The crux of the argument is that these changes would economic regulation and result in harm to the trucking industry. One major problem is that the two ports would start having different rules regarding labor.

The Clean Truck Program is designed to encourage rapid improvement of air quality at both ports through use of grants and financial incentives that will allow trucking companies to accelerate the replacement of older, high-polluting trucks with newer, cleaner trucks. While the Port of Los Angeles has been mandating that drivers not be drawn from an owner-operator pool, Long Beach allows terminal access to trucking companies that employ drivers, independent operators or companies that use a combination of employees and independent operators.