Michael Shulman
OptionsZone.com
Up, down, up, down – 800-point market gains, bookended by 400-point losses and punctuated with 200-point gains.
The dizzying market activity of 2008 is forcing investors to the sidelines to hide their cash (and contend with their newfound case of vertigo).
If you’re looking toward Wall Street for some reassurance that this whipsaw trading action will stop anytime soon, well, here is the growing mantra on Wall Street:
First housing failed, then the credit and equity markets, and now it’s the economy’s turn. A neat, three-step process for economic meltdown.
And now that we’re in this third leg, according to the Street, the markets are now nearing a bottom.
If you listen to the pundits, the markets will be heading up as soon as the Street sees a bottom in the recession – perhaps Q3 of next year – which means a sustainable market bounce in Q1, maybe Q2 of 2009.
Well, if you believe that, would you like to buy a bridge? (The one closest to Wall Street – the Brooklyn Bridge.)
Why do I say that? Because only a sucker could believe this nonsense coming out of Wall Street.
Let the suckers listen to the talking heads and invest (or not invest) accordingly
Analysts' Off-the-Wall (Street) Expectations
There are three fundamental reasons why Wall Street is dead-wrong on a quick turnaround for our economy and the stock market:
1. The Street sees a bottom in housing prices in early- to mid-2009.
If you do third-grade math on publicly available information for mortgages, housing inventory, the population and credit standards, you will see this will happen in mid- to late-2011. With this disconnect comes unreasonable assumptions about future bank write-downs and future consumer spending.
2. The Street sees a slowdown in write-offs and thinks the credit markets are already healing.
This is the reason it was surprised by Wachovia’s (WB) write-offs and why the talk is uneasy when it comes to Citigroup (C), the book of business Morgan Stanley (MS) got with Washington Mutual (WM) and what exactly Bank of America (BAC) is finding as it sorts through Countrywide’s balance sheet.
The Street is also in willful denial about the coming sharp acceleration in bad credit card, home equity and auto loan debt due to the recession. And, as long as write-offs continue and eat away at bank capital, lending will continue to contract.
3. The Street says the consumer is tapped out and will be for at least three quarters.
Consumers are not just tapped out – they are only beginning to suffer and will soon go into hibernation. The $800 billion in home equity draw-downs that supported spending in past years has nearly evaporated down to a few billion.
Consensus estimates now put future unemployment at 8% – I see it a couple of points higher – which means even less consumer spending; Our proprietary ChangeWave Research network surveys show some of the worst consumer and business spending plans in the past seven years.
Businesses are not getting the credit to expand or even stay afloat; they see fewer consumers spending and more cutting back; and export markets are imploding due to the credit crisis and the rapid rise in the dollar. GDP is contracting and will continue to do so faster than Street estimates.
The bottom line: We are not near the beginning of the end of this crisis; we are at merely at the end of the beginning.
Reality Has a New Definition
Over time, equity markets will face reality and come way down. But even if the market stays where it is right now, this does not mean we cannot make money through this crisis – you can.
So, let’s take a hard, fundamental look at the crisis – without ideology or willful optimism – and from there, you will see how profits can head your way once you join us at ChangeWave Shorts.
The Epicenter – Housing
The epicenter of this crisis – as I have been saying since February 2007 – is the U.S. housing market and declining home prices. The overhang of inventory and continuing foreclosures will continue depressing home prices.
Analysts see a bottom in a couple of quarters – I see it in a couple of years. Here is why:
* In the past, the magic number that signaled a bottom was a decline in housing starts below 1 million per annum. Current levels are well-below that – but foreclosures, most of them of relatively new homes, are at stratospheric levels. If you add new housing starts and while number of foreclosures above historical norms, you have a "synthetic" housing start rate that’s not too far from the days of the bubble.
* Why am I so certain that foreclosures will continue apace? Third-grade math – I looked at when subprime, Alt-A, option Adjustable-Rate Mortgages (ARMs) and other funky and less-than-creditworthy mortgages were granted and when these re-set.
We are nearing peak defaults among Alt-A and subprime mortgage holders – foreclosures will follow in around six months – but are about to be hit by a giant wave of defaults and foreclosures from option ARMs and the recession.
Option ARMs are those crazy mortgages that let you pick what kind of payment you make in a month and you can roll over interest into your principal. Then you hit a loan-to-value ratio and – boom!
Further, housing inventory of 1.5 million units, or 10 to 11 months, is going to stay at least that high for another year.
But markets are local, you say?
Fewer Buyers, Bigger Problems
The market for a specific house is local, but the dynamic that drives mortgage credit standards and lending is national. This translates into a 40%-50% reduction in the number of qualified buyers compared to 2006, independent of the impacts of a recession.
You can look up the data and do the math yourself – between 36% and 45% of buyers at the peak of the housing bubble had either subprime or Alt-A loans, and default rates for prime borrowers are more than triple what they were before the crisis. And standards have now overshot – a 50% reduction in eligible buyers may be generous, though it is probably more.
So, do the math – excess inventory facing a market at least half as big as it was just two years ago means continuing inventory issues and a continuing fall in home values. Defaults will peak in 12 to 15 months, foreclosures will top in 6 to 12 months after that, and inventory will hit the ceiling 6 to 12 months after that.
This puts us in the middle or end of 2011 when things get truly stable and prices see a bottom.
The Banks and the Credit Markets
If all banks had to sell their assets today, the U.S. banking system – using conventional accounting methods – would be technically insolvent, as are most banking systems around the world.
The situation is far worse than the during the banking crises of the 1930s – it is just that the government and the Fed have learned some, if not all, lessons from that disaster and have kept the system afloat by essentially printing money and injecting it into the system.
Several things are currently at work within the system and all aim at one goal – reducing the leverage among banks.
What is leverage? It is a measure of how much a bank lends (i.e., the assets it acquires) compared to the amount of its core capital fund or equity – pick your pleasure – of that bank. Traditional banks typically have a buck in a deposit account and lend out 11 or 12 bucks.
At the time Bear Stearns fell, though it was not a traditional bank but an investment bank, it was leveraged almost 35-to-1; the other investment banks were in the same neighborhood. And some foreign banks – notably the Germans – were leveraged at almost at 50-to-1. Over time, this is going to fall to in the range of 11-1 to 15-1.
How will this happen?
1. Banks will increase their equity and core capital, which will increase the denominator, and …
2. Banks will reduce lending and the assets they acquire, reducing the numerator.
This is well under way – but it’s the primary reason we are only about one-third through this mess.
And this is why we still have a long way to go:
Bank capital is actually decreasing due to write-offs. Despite Uncle Sam’s best efforts to raise more capital, core and equity capital will remain stagnant at best for quite a while.
Foreign investors have been badly burned by previous investments in the banks – and now Uncle Sam is in line ahead of the banks to get paid back for the preferred shares, as well as private investors such as Warren Buffett.
The banks, by de-leveraging, are reducing their ability to generate future profits – not to mention the end or reduction in many profitable activities, such as mortgage securitization, IPOs, mergers and so on – and their ability to internally generate profits to increase capital is virtually nil.
This lack of operating profits also reduces their abilities to pay dividends and attract capital. It is very possible that the banks will not be able to generate more than 25% of the operating profits we saw at the peak of their previous peak for at least five years.
How does this affect us?
The impact comes in the form of significantly less business and consumer lending. This process of de-leveraging will take time and there will be fits and starts as the banks get hit with higher-than-expected write-offs and a sharp recession.
We were down more than $3 trillion – with a T – in 2008. Expect more next year, as we could see a cutback as steep as $5 trillion. This cutback could make the recession longer and deeper and the recovery more difficult than at any time since the early 1980s.
Don’t shoot the messenger – I didn’t sell anyone a subprime mortgage. I’m just doing simple math.
The Recession
We have been in a recession since Q4 of 2007 and it is accelerating rapidly as credit contracts for consumers and businesses. Does this really matter?
I bumped into a Wachovia guy recently and he told me it is not doing any commercial lending greater than $5 million. Even applicants requesting less than that are probably wasting their time.
Minimum credit card payments are doubling, home equity lines are being cancelled or pulled in, and a regulatory change in credit card markets next year could end up killing more than $2 trillion in consumer credit lines. The recession is evidenced in both consumer and business behavior.
The consumer is going into hibernation – Go to a department store and check it out for yourself. The lines are shorter everywhere except Costco (COST) and Wal-Mart (WMT). The holiday season could be the worst in two decades, from stores to restaurants to travel.
Three months ago, while booking hotel reservations for a trade show, Mandalay Bay in Las Vegas was offering upscale suites (I am generally a Hampton Inn kind of guy, but my wife was traveling with me) in its new tower for about $375. I checked last night and those same rooms are going for $176.
My favorite hotel (because of smoke-free poker room) is the Mirage – and its rooms just broke below $100 on Expedia (EXPE).
As a consumer yourself, which deal would you choose?
In this case, with consumers vacationing closer to home (if at all), the hotel industry scrambling to fill rooms, and checked-baggage charges scaring customers away from air travel, we started looking at companies that would feel a peripheral pinch. As it happened, our ChangeWave survey research indicated that fewer people were using online booking sites like Expedia and opting instead to book directly through hotels and airlines.
The moral to the story: What looks like a no-brainer can turn out to be a big gainer!
Business is contracting – Speaking of the ripple effect of bad news and bad business, we’ve seen the mortgage industry – which is down by about 80% – lay off countless workers. Investment and big banks are also conducting huge layoffs. Residential construction is down two-thirds, automakers are laying people off, and so on.
But, you may ask, isn’t all the money that Uncle Sam and the Fed have pumped into the economy and the reduction in interest rates going to help?
No – the money has been pumped into the financial system but has not made its way into the economy. Why? We are in what is called a "liquidity trap" – money is being pumped into the financial system and banks are sitting on it to rebuild their balance sheets. The money is going into the front-end of the pipe – read: banks – but not coming out of the pipe at the other end (into the economy).
Until de-leveraging is at least two-thirds complete, this money will be sucked up and sat on. That means the recession will be long – until at least early- to mid-2010 – and deeper with 9% unemployment or more – than Wall Street expects.
This means sharp downturns in corporate profits that are much lower than even lowered expectations. As they come down, individual stock prices and the general market will come down.
The Equity Markets
Massive market movements have recently been described as the result of panic and massive liquidations by hedge funds. (Remember that bridge I wanted to sell you?)
Standard & Poor’s earnings estimates are down 30.5% since September and the market was down 38% in 2008. I don’t believe in this kind of a coincidence – but I do believe general markets will continue to drop. Let’s look at recent changes in estimates for the S&P 500 (SPX) for 2009:
* March 2008 – estimates of $80-$82
* September 2008 – estimates of $64-$67
* In the past few weeks we’ve seen estimates of around $50. This puts the S&P 500 at a multiple of around 18 times future earnings, which is historically the high end of the range for the S&P.
Now let’s do some math:
* In the higher range of S&P earnings multiples – 15, or an S&P 500 index of 750 in 2009
* In the middle range of S&P earnings multiples – 12, or an S&P 500 index of 600 in 2009
* In the low range of S&P earnings multiples – 9, or an S&P 500 index of 450 in 2009
This is all based on the assumption that earnings forecasts – and actual earnings results – are not lower.
Back to the now – the current market is trading at roughly 18 times 2009’s latest consensus forecast for S&P earnings. If the market adjusts to longer-term historical norms, we could see a trading range of 450-750 on the S&P 500, or declines ranging from 15% to 50%.
What should you do?
Get on the Short Side of Life
Everyone should be at least partially in short-side positions – and in this crisis, you can up your exposure. I accomplish this by buying puts, not actually shorting stocks.
What companies and market segments are the best places for a short side investment? Wherever we have the most compelling proof that Wall Street currently has it wrong and is setting itself up for a major downside surprise.
Right now, that means:
The Banks – They are way overvalued. It may take time for this to manifest in their respective stock prices, but it will happen. All announced government actions, over time, will be significantly dilutive to existing shareholders and eventually drive stock prices down based on the fundamental ability of these companies to generate earnings per share.
The worst of the litter? Citigroup (C), and look for Bank of America (BAC) and Wells Fargo (WFC) to deliver some unpleasant surprises to stockholders.
Homebuilders – They are furiously writing off properties and raw land to take advantage of a special tax rebate program that expires at year-end because, once this is over, their financial weaknesses will be very transparent.
Once one homebuilder goes bankrupt, credit lines will dry up and the stocks will take their last legs down. Take a look at Beazer Homes (BZH).
Consumer Spending – Going, going, gone. Let’s put it this way, Santa cannot afford the feed for the reindeer this year.
Many stocks are trading at 52-week or multiyear lows, but we are looking at a consumer recession that could rival that of the early 1980s. Even though put premiums may appear high, there are plenty of opportunities.
Take a look at the obvious quasi-luxury targets like Tiffany & Co. (TIF) and Nordstrom (JWN), as well as the less-obvious names like the Cheesecake Factory (CAKE).
Tech and Pharma – Healthcare, what many see as a "safe haven," makes me want to offer you that bridge yet again if you’re looking at buying some of these stocks.
Pfizer (PFE) is going to be creamed when its Lipitor patent expires in 2010. And the orthopedics guys are discovering that joint replacements are elective surgeries for many who cannot afford co-pays and deductibles; so, you may also want to check out Stryker (SYK) and Zimmer (ZMH) for big potential on the short side.
Swoop Down on Profits Like a Vulture
Wall Street is littered with broken companies today, just like a busy interstate is littered with carrion. The vultures have it right. They don’t waste their energy stalking prey; they take advantage of a feast when it presents itself.
Vulture investors – and I’m proud to be one – do the very same thing.
Wednesday, January 21, 2009
Wall Street Digest Hotline Update
This is The Wall Street Digest Hotline Update for Tuesday, January 20, 2009, at 6:00 p.m. EST.
Financial stocks led the market lower today. At the close, the Dow plunged 332 points, closing at 7,949, while the Nasdaq dropped 88 points, closing at 1,441. The S&P 500 fell almost 45 points, closing at 805. Oil closed $2.23 higher at $38.74 per barrel, and gold closed $15.30 at $855.20 per ounce.
Fears that the global banking crisis is worsening sent financial stocks plunging today, with many companies' shares down by double-digit percentages and Citigroup Inc. diving to a 17-year low.
U.S and British banks are still suffering losses from loans and are warning that those losses will not subside anytime soon. Regional banks as well as the big money center banks are struggling.
Evidence that the banking crisis is worsening overseas also rattled investors. Bank stocks also dropped in the aftermath of multibillion losses announced Friday by Citigroup Inc. and Bank of America Corp.
An $825 billion stimulus bill will not stop the next Great Depression to unfold between 2010 and 2022, a period of 12 years. Pay off all debts. Sell all of your real estate if possible.
All of the bubbles including commodities, the stock market, and real estate will burst and crash. Nothing can stop the 2010-2012 bear market and recession because all of the engines of economic growth will turn negative by mid-2010.
The next Hotline Update will be on Friday, January 23, 2009, at 6:00 p.m. EST.
Financial stocks led the market lower today. At the close, the Dow plunged 332 points, closing at 7,949, while the Nasdaq dropped 88 points, closing at 1,441. The S&P 500 fell almost 45 points, closing at 805. Oil closed $2.23 higher at $38.74 per barrel, and gold closed $15.30 at $855.20 per ounce.
Fears that the global banking crisis is worsening sent financial stocks plunging today, with many companies' shares down by double-digit percentages and Citigroup Inc. diving to a 17-year low.
U.S and British banks are still suffering losses from loans and are warning that those losses will not subside anytime soon. Regional banks as well as the big money center banks are struggling.
Evidence that the banking crisis is worsening overseas also rattled investors. Bank stocks also dropped in the aftermath of multibillion losses announced Friday by Citigroup Inc. and Bank of America Corp.
An $825 billion stimulus bill will not stop the next Great Depression to unfold between 2010 and 2022, a period of 12 years. Pay off all debts. Sell all of your real estate if possible.
All of the bubbles including commodities, the stock market, and real estate will burst and crash. Nothing can stop the 2010-2012 bear market and recession because all of the engines of economic growth will turn negative by mid-2010.
The next Hotline Update will be on Friday, January 23, 2009, at 6:00 p.m. EST.
Thursday, January 15, 2009
Wall Street Digest Hotline Update
This is The Wall Street Digest Hotline Update for Tuesday, January 13, 2009, at 6:00 p.m. EST.
Falling commodity prices continue to weigh on the market. At the close, the Dow lost 25 points, closing at 8,449, while the Nasdaq gained 7 points, closing at 1,546. The S&P 500 gained slightly more than one point, closing at 872. Oil closed $0.19 up at $38.27 per barrel, and gold closed $0.30 down at $820.70 per ounce.
The economic news is bad and it will get worse. A global recession is underway. A global depression will unfold by mid-2010.
Deflation is the Fed's biggest fear, because deflationary psychology is difficult to reverse. "Why should I buy a home today, when it will be cheaper next month or next year?" As a result, home prices continue to fall. Four-percent mortgage rates would help if our regulators could get the banks to lend money. Home prices still have much further to fall. An 11.2-month inventory of homes for sale weighs on the market.
On Thursday, January 8th, President Elect Obama said, "We will spend our way out of this mess." Investors and consumers do not believe an $800 billion stimulus bill will produce prosperity. FDR tried that with the New Deal in the 1930s. It did not work. The Great Depression of the 1930s still lasted 12 years. The next Great Depression will unfold between 2010 and 2022, a period of 12 years. Pay off all debts. Sell all of your real estate if possible.
The Kress major market down cycles bottomed on December 22. I expect a bear market rally to unfold between January and July 2009. This rally may or may not post new highs in 2009. This will be a temporary bear market rally, not a new bull market. All of the bubbles including commodities, the stock market, and real estate will burst and crash by mid-2010. Nothing can stop the 2010-2012 bear market and recession because all of the engines of economic growth will turn negative by mid-2010.
The next Hotline Update will be on Friday, January 16, 2009, at 6:00 p.m. EST.
Falling commodity prices continue to weigh on the market. At the close, the Dow lost 25 points, closing at 8,449, while the Nasdaq gained 7 points, closing at 1,546. The S&P 500 gained slightly more than one point, closing at 872. Oil closed $0.19 up at $38.27 per barrel, and gold closed $0.30 down at $820.70 per ounce.
The economic news is bad and it will get worse. A global recession is underway. A global depression will unfold by mid-2010.
Deflation is the Fed's biggest fear, because deflationary psychology is difficult to reverse. "Why should I buy a home today, when it will be cheaper next month or next year?" As a result, home prices continue to fall. Four-percent mortgage rates would help if our regulators could get the banks to lend money. Home prices still have much further to fall. An 11.2-month inventory of homes for sale weighs on the market.
On Thursday, January 8th, President Elect Obama said, "We will spend our way out of this mess." Investors and consumers do not believe an $800 billion stimulus bill will produce prosperity. FDR tried that with the New Deal in the 1930s. It did not work. The Great Depression of the 1930s still lasted 12 years. The next Great Depression will unfold between 2010 and 2022, a period of 12 years. Pay off all debts. Sell all of your real estate if possible.
The Kress major market down cycles bottomed on December 22. I expect a bear market rally to unfold between January and July 2009. This rally may or may not post new highs in 2009. This will be a temporary bear market rally, not a new bull market. All of the bubbles including commodities, the stock market, and real estate will burst and crash by mid-2010. Nothing can stop the 2010-2012 bear market and recession because all of the engines of economic growth will turn negative by mid-2010.
The next Hotline Update will be on Friday, January 16, 2009, at 6:00 p.m. EST.
Wednesday, January 14, 2009
Apartments Try to Stay Afloat
JANUARY 14, 2009
The rapid reversal of fortunes in commercial real estate is taking down yet another sector: apartment complexes.
Owners and developers of multifamily buildings are trying to stay afloat as the deteriorating economy and escalating job losses create difficulties in raising rents and shortfalls in projected revenues from these buildings.
While sharp declines in retail and office sectors of commercial real estate have commanded attention in recent months, some analysts say deterioration in the multifamily sector is quickly catching up.
A downturn in this sector also drags in housing mortgage giants Fannie Mae and Freddie Mac, which are already hurting from ...
The rapid reversal of fortunes in commercial real estate is taking down yet another sector: apartment complexes.
Owners and developers of multifamily buildings are trying to stay afloat as the deteriorating economy and escalating job losses create difficulties in raising rents and shortfalls in projected revenues from these buildings.
While sharp declines in retail and office sectors of commercial real estate have commanded attention in recent months, some analysts say deterioration in the multifamily sector is quickly catching up.
A downturn in this sector also drags in housing mortgage giants Fannie Mae and Freddie Mac, which are already hurting from ...
Commercial Sector Expects Things to Get Worse
JANUARY 14, 2009
Riverside-San Bernardino, Calif.
By MAURA WEBBER SADOVI | SPECIAL TO THE WSJ
California's Inland Empire, the two-county region that stretches east of Los Angeles, has gone from a booming development smorgasbord to a basket case in a few short years.
The Riverside-San Bernardino area's unemployment level rose to 9.5% in November, tying with Detroit to lay claim to the highest unemployment rate of any large U.S. metropolitan area, according to the Labor Department. Third-quarter home-foreclosure rates were the third-highest of the nation's metros surveyed by RealtyTrac and the area's median single-family home price fell 39.4% to $227,200 in the third quarter from a year earlier, according to the National Association of Realtors.
The Inland Empire's commercial real-estate market also is by no means the picture of health. Roughly one-fifth of its office market is now vacant, store rents are plummeting and a rising number of warehouses are emptying as retailers have filed for bankruptcies and imports into the nearby ports of Los Angeles have slumped.
Still, as in many parts of the country, for now the downturn of commercial property in this region isn't as severe as that of its residential sector and job market.
Home to about 4.2 million people, the Inland Empire was favored in recent years by new residents and many industrial investors drawn to its expanse of relatively affordable land near Los Angeles.
So far, the region's commercial market isn't yet topping out the nation's various misery indexes, but it appears likely things will get worse before they get better. "We don't know when and where the bottom is," says Tim O'Rourke, executive vice president with Jones Lang LaSalle's industrial group in Los Angeles.
Mr. O'Rourke says the Inland Empire industrial market is still viewed as having long-term promise due to the area's above-average population growth and location. But as retail bankruptcies mount, an increasing amount of distribution space is going vacant, including a warehouse in Rancho Cucamonga previously occupied by Wickes Furniture Co., he says.
Warehouse vacancies in the third quarter remained among the country's lowest, even after roughly doubling over the past 12 months, according to Boston-based Property & Portfolio Research Inc., a real-estate research firm. Harder hit are metrowide office vacancies, which rose above 20%, and fourth-quarter retail rents, which had the third-highest percentage decline of 76 major metros tracked by New York-based Reis Inc., a real-estate research firm.
Delinquencies on commercial mortgages packaged and sold as bonds, which represent nearly a third of the commercial real-estate debt market, suggest the Inland Empire's retail market is getting hit particularly hard by the downturn, as evidenced by delinquencies on commercial mortgage-backed securities, or CMBS. A study of delinquencies in the region's largest cities and towns showed four retail properties with delinquent CMBS loans valued at a total of $165 million, according to Richard Parkus, head of research on such bonds for Deutsche Bank.
There were no delinquent office, warehouse, apartment or hotel loans in the region, according to the CMBS survey. But the retail problems gave the market an aggregate commercial delinquency rate of 3.8% as of December, well above the overall national delinquency rate of 1.2%, Mr. Parkus says. "Retail is going to get slammed in the Inland Empire, and it's already starting," Mr. Parkus says.
That outlook for the office and warehouse sector is also looking tougher. Financial companies are still emptying office space, including about 265,000 square feet in Rancho Cucamonga to be vacated by a unit of Citigroup Inc. in March.
New supply also will raise competition for shrinking warehouse users. While most public companies have ended any speculative building in the area, some 7.4 million square feet of warehouse facilities are expected to be completed this year, the highest volume of major markets tracked by PPR in the U.S.
Write to Maura Webber Sadovi at maura.sadovi@wsj.com
Riverside-San Bernardino, Calif.
By MAURA WEBBER SADOVI | SPECIAL TO THE WSJ
California's Inland Empire, the two-county region that stretches east of Los Angeles, has gone from a booming development smorgasbord to a basket case in a few short years.
The Riverside-San Bernardino area's unemployment level rose to 9.5% in November, tying with Detroit to lay claim to the highest unemployment rate of any large U.S. metropolitan area, according to the Labor Department. Third-quarter home-foreclosure rates were the third-highest of the nation's metros surveyed by RealtyTrac and the area's median single-family home price fell 39.4% to $227,200 in the third quarter from a year earlier, according to the National Association of Realtors.
The Inland Empire's commercial real-estate market also is by no means the picture of health. Roughly one-fifth of its office market is now vacant, store rents are plummeting and a rising number of warehouses are emptying as retailers have filed for bankruptcies and imports into the nearby ports of Los Angeles have slumped.
Still, as in many parts of the country, for now the downturn of commercial property in this region isn't as severe as that of its residential sector and job market.
Home to about 4.2 million people, the Inland Empire was favored in recent years by new residents and many industrial investors drawn to its expanse of relatively affordable land near Los Angeles.
So far, the region's commercial market isn't yet topping out the nation's various misery indexes, but it appears likely things will get worse before they get better. "We don't know when and where the bottom is," says Tim O'Rourke, executive vice president with Jones Lang LaSalle's industrial group in Los Angeles.
Mr. O'Rourke says the Inland Empire industrial market is still viewed as having long-term promise due to the area's above-average population growth and location. But as retail bankruptcies mount, an increasing amount of distribution space is going vacant, including a warehouse in Rancho Cucamonga previously occupied by Wickes Furniture Co., he says.
Warehouse vacancies in the third quarter remained among the country's lowest, even after roughly doubling over the past 12 months, according to Boston-based Property & Portfolio Research Inc., a real-estate research firm. Harder hit are metrowide office vacancies, which rose above 20%, and fourth-quarter retail rents, which had the third-highest percentage decline of 76 major metros tracked by New York-based Reis Inc., a real-estate research firm.
Delinquencies on commercial mortgages packaged and sold as bonds, which represent nearly a third of the commercial real-estate debt market, suggest the Inland Empire's retail market is getting hit particularly hard by the downturn, as evidenced by delinquencies on commercial mortgage-backed securities, or CMBS. A study of delinquencies in the region's largest cities and towns showed four retail properties with delinquent CMBS loans valued at a total of $165 million, according to Richard Parkus, head of research on such bonds for Deutsche Bank.
There were no delinquent office, warehouse, apartment or hotel loans in the region, according to the CMBS survey. But the retail problems gave the market an aggregate commercial delinquency rate of 3.8% as of December, well above the overall national delinquency rate of 1.2%, Mr. Parkus says. "Retail is going to get slammed in the Inland Empire, and it's already starting," Mr. Parkus says.
That outlook for the office and warehouse sector is also looking tougher. Financial companies are still emptying office space, including about 265,000 square feet in Rancho Cucamonga to be vacated by a unit of Citigroup Inc. in March.
New supply also will raise competition for shrinking warehouse users. While most public companies have ended any speculative building in the area, some 7.4 million square feet of warehouse facilities are expected to be completed this year, the highest volume of major markets tracked by PPR in the U.S.
Write to Maura Webber Sadovi at maura.sadovi@wsj.com
Friday, January 9, 2009
Great Depression jobs parallel may not be far flung
By Pedro Nicolaci da Costa
NEW YORK (Reuters) - When economists tell us the current U.S. slump could never turn into another Great Depression, they all point to one thing: one of four Americans was out of work in the 1930s.
But since the definition of joblessness has changed over the years, this expert assessment might be too rosy.
As many as 25 percent of Americans were unemployed during the days of bread lines that symbolized the Depression, but that figure is more than three times the current 6.7 percent unemployment rate, the economists say. Even the most pessimistic estimates only foresee the rate rising barely above 10 percent.
"We are in a very, very different place than the U.S. economy was in the 1930s," James Poterba, president of the National Bureau of Economic Research told a recent Reuters Summit.
Or are we? Figures collected for Reuters by John Williams, from the electronic newsletter Shadowstats.com, suggest that, while we are not there yet, the comparison is not as outlandish as it might initially seem.
By his count, if unemployment were still tallied the way it was in the 1930s, today's jobless rate would be closer to 16.5 percent -- more than double the stated rate.
"I expect that unemployment in the current downturn, which will be particularly deep and protracted, eventually will rival, if not top, the 25 percent seen in the Great Depression," Williams said.
He and other critics have one particular sticking point with the current way of measuring unemployment: the treatment of discouraged workers.
Under President Lyndon Johnson, the government decided individuals who had stopped looking for work for more than a year were no longer part of the labor force. This dramatically decreased the jobless rate reported by the government.
"Both part-time workers wanting full-time work and discouraged workers tend to make the unemployment rate lower than it would otherwise be," says Robert Schenk, professor of economics at St. Joseph's College, Indiana.
The latest report, due on Friday, is expected to show another month of more than half a million job losses in December, and a jump in the unemployment rate to 7 percent.
However, some economists, including Kenneth Rogoff at Harvard University, now say joblessness could top 11 percent. Under Williams' methodology, that picture might look much more like the Great Depression.
(Reporting by Pedro Nicolaci da Costa; Editing by Kenneth Barry)
NEW YORK (Reuters) - When economists tell us the current U.S. slump could never turn into another Great Depression, they all point to one thing: one of four Americans was out of work in the 1930s.
But since the definition of joblessness has changed over the years, this expert assessment might be too rosy.
As many as 25 percent of Americans were unemployed during the days of bread lines that symbolized the Depression, but that figure is more than three times the current 6.7 percent unemployment rate, the economists say. Even the most pessimistic estimates only foresee the rate rising barely above 10 percent.
"We are in a very, very different place than the U.S. economy was in the 1930s," James Poterba, president of the National Bureau of Economic Research told a recent Reuters Summit.
Or are we? Figures collected for Reuters by John Williams, from the electronic newsletter Shadowstats.com, suggest that, while we are not there yet, the comparison is not as outlandish as it might initially seem.
By his count, if unemployment were still tallied the way it was in the 1930s, today's jobless rate would be closer to 16.5 percent -- more than double the stated rate.
"I expect that unemployment in the current downturn, which will be particularly deep and protracted, eventually will rival, if not top, the 25 percent seen in the Great Depression," Williams said.
He and other critics have one particular sticking point with the current way of measuring unemployment: the treatment of discouraged workers.
Under President Lyndon Johnson, the government decided individuals who had stopped looking for work for more than a year were no longer part of the labor force. This dramatically decreased the jobless rate reported by the government.
"Both part-time workers wanting full-time work and discouraged workers tend to make the unemployment rate lower than it would otherwise be," says Robert Schenk, professor of economics at St. Joseph's College, Indiana.
The latest report, due on Friday, is expected to show another month of more than half a million job losses in December, and a jump in the unemployment rate to 7 percent.
However, some economists, including Kenneth Rogoff at Harvard University, now say joblessness could top 11 percent. Under Williams' methodology, that picture might look much more like the Great Depression.
(Reporting by Pedro Nicolaci da Costa; Editing by Kenneth Barry)
Wednesday, January 7, 2009
Apartment rents show first decline in over 5 years
Wed Jan 7, 2009 3:46am EST
BOSTON (Reuters) - Average rents for U.S. apartments fell in the fourth quarter, as a sharp economic downturn and rising unemployment left Americans unwilling to pay higher prices, according to data released on Wednesday.
Rents fell 0.4 percent in the final quarter of 2008, the first decline since early 2003, the study by real estate research firm Reis Inc found.
The vacancy rate rose to 6.6 percent, a level last seen in the first quarter of 2005, and up from 5.7 percent a year earlier.
While few Americans typically move in the fourth quarter, as they face the onset of the northern hemisphere winter and several national holidays, the decline in rents shows that landlords are moving quickly to try to keep vacancies down, said Victor Calanog, director of research at Reis.
"The quantity of rental apartments might not be suffering as much, but the price paid by households to occupy those rental units is buckling under the strain, with landlords lowering asking rents and raising the amount of concessions they are willing to provide," Calanog said.
The current global economic downturn can be traced back to the decline in U.S. home prices that began in the middle of the decade. That led to a collapse in the subprime lending market, which last year snowballed into a global credit crunch.
The slump is not confined to residential properties. Reis data released on Tuesday showed that office rents across the United States fell 1.2 percent in the fourth quarter, as a slumping economy drove vacancy rates higher.
Shares of major U.S. owners of apartment complexes including Apartment Investment and Management Co, Equity Residential and AvalonBay Communities Inc have been pummeled in recent months.
(Reporting by Scott Malone; Editing by Tim Dobbyn)
BOSTON (Reuters) - Average rents for U.S. apartments fell in the fourth quarter, as a sharp economic downturn and rising unemployment left Americans unwilling to pay higher prices, according to data released on Wednesday.
Rents fell 0.4 percent in the final quarter of 2008, the first decline since early 2003, the study by real estate research firm Reis Inc found.
The vacancy rate rose to 6.6 percent, a level last seen in the first quarter of 2005, and up from 5.7 percent a year earlier.
While few Americans typically move in the fourth quarter, as they face the onset of the northern hemisphere winter and several national holidays, the decline in rents shows that landlords are moving quickly to try to keep vacancies down, said Victor Calanog, director of research at Reis.
"The quantity of rental apartments might not be suffering as much, but the price paid by households to occupy those rental units is buckling under the strain, with landlords lowering asking rents and raising the amount of concessions they are willing to provide," Calanog said.
The current global economic downturn can be traced back to the decline in U.S. home prices that began in the middle of the decade. That led to a collapse in the subprime lending market, which last year snowballed into a global credit crunch.
The slump is not confined to residential properties. Reis data released on Tuesday showed that office rents across the United States fell 1.2 percent in the fourth quarter, as a slumping economy drove vacancy rates higher.
Shares of major U.S. owners of apartment complexes including Apartment Investment and Management Co, Equity Residential and AvalonBay Communities Inc have been pummeled in recent months.
(Reporting by Scott Malone; Editing by Tim Dobbyn)
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