Monday, August 10, 2009

A Real Estate Defibrillator?

Posted by: Scott Beggs
Investment Specialist
775 336 4644

Scott joined NAI Alliance in March 2008 to assist the company with investment sales. Previously, Beggs spent over seven years with Dermody Properties as Vice President of Acquisitions and Port Management.

If you’re at all involved in the arena of commercial real estate investment and finance, the most common questions asked is , “How can the deal be financed?” My first answer is that there is no rule that debt financing has to be used to acquire commercial real estate. There was a time when most institutions bought assets with 100% equity. In those days debt was viewed as adding risk and that these conservative institutions were not too excited about increasing the risk of an investment, even if it increased the returns. What a novel concept, there is a trade-off between risk and return.

However, for most investors the use of debt financing is a foregone fact of life. The use of debt allows investors to ration their equity and potentially enhance their returns. Unfortunately for these debt-hungry investors, the CMBS market has come to a grinding halt, banks are hoarding cash, and life companies are focused only on the top-tier of the commercial real estate investment universe. The net result is that debt financing has become more rare than the Atkins Diet.

So does that mean that real estate investment will go the way of floppy-discs? Not hardly. Already we are seeing signs of the public market filling the void. There have been no fewer than 25 IPO registrations for mortgage REITS. On average these funds would raise between $500M and $1.0B. While this is a drop in the bucket compared to the issuance of CMBS during the go-go days of 2005 and 2006, this capital will partially satiate the needs of the commercial real estate industry. Also, there are rumors that there may be a new CMBS issuance by the end of this year. This issuance will likely reflect the more conservative underwriting standards required by today’s risk averse investors.

Regardless, there is no doubt in my mind that capital will once again begin moving through the veins of the comatose real estate investment industry.

Friday, August 7, 2009

Reduction in Consumer Spending is Upon Us

Posted by: Kelly Bland Retail Specialist
775 336 4662

Kelly specializes in anchor tenant representation and shopping center anchor leasing, acquisition and site sales for both retail land and shopping center sites. Additionally, Kelly is involved in investment sales of retail properties.

Ever since I attended college and started paying attention to economics, it has been a constant mantra on the news that consumer spending made up roughly two-thirds of the Gross Domestic Product or GDP. The other one-third was comprised of business investment. Since it has been divided that way ever since I can recall, I assumed that it was just the way it was and should be. But along the way, we started to get some warning bells going off.

In 2006, the U.S. was showing a negative savings rate of 1%, which was the largest negative savings rate since the great depression in 1933 when it was negative 1.5%. In fact, in 2006 it had been negative for 21 consecutive months. During these boom years, people viewed their rising stock and home values as a defacto savings account that was doing the savings for them, i.e. all gain with no pain of having to actually save money out of their incomes.The latest national figures show that the savings rate increased to 6.9% of income. This is by far the largest amount consumers have socked away for some time. This allowed consumers to shift more money into spending so that by 2007, consumer spending was making up about 71% of GDP.

Then came declines in the housing markets. It first started with the sub-prime loans turning bad but eventually spread to housing value declines across all sectors and in most markets. In our local economy, the Median home price for Washoe County, NV now sits at $182,000 as of June of 2009. That is off the high water mark of $325,000 set in October of 2005, or a 44% decline. Using this median home value as a metric does not necessarily indicate that everyone’s home in Washoe County has come down in value by 44% per se, but we know that we have taken substantial hits on our values.

The housing declines were followed by a precipitous drop in the stock market. After hitting a high of 14,164 on October 9, 2007, the stock market declined 55% by the time it reached the low set on March 9, 2009 at 6,440. Even after rising 44% off the lows, the Dow Jones Industrial Stock Index in early August 2009 is still off over 34% from its high set in on October, 2007.

With a current decline in the stock market of 34% and a 44% decline in the median home price, local consumers are now seeing a major decline in values for their two largest asset classes. Consumers can no longer save by watching their stocks and home values rise. They actually have to save money from their incomes, which is exactly what they are doing.

The latest national figures show that the savings rate increased to 6.9% of income. This is by far the largest amount consumers have socked away for some time. Compared to a 1% negative savings rate in 2006, this is a total swing of 7.9% coming out of consumer spending.

Another factor impacting consumer spending is the level of unemployment and underemployment. The national unemployment rate currently stands at 9.5% while Washoe County has an 11.8% unemployment rate and rising. There are also a large number of underemployed people working at part time jobs even though they would like full time employment. One report I recently read indicated that Washoe County could have a figure closer to 21% including unemployed, underemployed and people who have quit looking for jobs. While unemployed and underemployed consumer spending does not drop to zero, their discretionary spending is largely limited and has a negative impact on overall consumer spending.

The effects of the decline in home value can be divided into two camps. One is the overall “wealth effect” and the other is the lack of availability of home equity loans available to homeowners now. A 2007 study by the Congressional Budget Office titled Housing Wealth and Consumer Spending made an attempt to quantify these two issues. The report showed that home equity withdrawals peaked in late 2004 and 2005 at nearly $900 billion per year. They estimated that one quarter or $225 billion of that home equity withdrawal was used for consumer spending. The report also indicated that at the height, the home equity withdrawals comprised slightly over 10% of personal disposable income. For many consumers, the equity in their homes has been decimated and many banks have either ratcheted down or withdrew lines of credit for home equity loans to borrowers. The loss of home equity lines of credit is another factor that will detract from overall consumer spending.

In addition to the retrenchment in the home equity lines of credit, credit card companies have also began to scale back credit limits for borrowers they consider a credit risk, further reducing consumer spending.

All of these factors have led to a “perfect storm” for the consumer. Loss of wealth in their stock portfolio and homes, loss or fear of job loss, and less available credit has led consumers to increasing their savings rate substantially. All of these factors impact the consumer’s ability to continue their spending at the peak levels set in 2007 and 2008. The question now is, “How much of an impact will this have on consumer spending going forward”?

This is where I need to make my disclosure. I’m a commercial real estate broker, not a full fledged economist. The following is my attempt to quantify this question the best I can after contemplating it for several months. So, here it goes.

If I add a 7.9% swing in savings, estimate 6% reduction from home equity loans, 2% reduction for unemployment and underemployment, and maybe 2% for reduction in stock prices and reduction in credit card spending limits, I come up with an estimate of 18%. Let’s say I underestimated the resilience of the consumer and/or the duration of prolonged unemployment and we add back 3%. We still have a reduction in consumer spending around 15%.

I think that would be a reasonable working estimate of what we should expect to see in regard to the reduction in consumer spending for the near future.

One question I have remains. What impact will this reduction in spending have on the amount of shopping center space needed to serve the consumer? I would say there will be a proportionate share of retail space that will be vacated and remain vacant until we see a resurgence in consumer spending. Perhaps it will be a bit less given the remaining retailers will probably suffer with reduced sales per square foot as well. Let’s say one-third of the loss is shared with the existing tenants with lowered sales and two-thirds results in store closing. That would indicate a vacancy rate increase of 10%.

Interestingly, our overall vacancy rate has increased from 6% in 2005 to 15.64% today. That’s almost a 10% increase in the vacancy rate. That seems to jibe pretty well.

Believe me, I know there is a lot of margin for shifting these estimates around. That is why I’ve had a challenge framing these estimates in my own mind for the last several months. But maybe, just maybe, we are getting close to the bottom in the occupancy levels within our local retail real estate market.

Monday, August 3, 2009

After Zero Residential Lot Transactions in the First 6 Months of 2009, Q3 is Off to a Good Start

Aaron West-Guillen / Land Specialist
Posted by: Aaron West-Guillen
Land Specialist / Land Entitilement Consultant
775 336 4674

Aaron West-Guillen has 15 years of land acquisition, entitlement and development experience in northern Nevada.

After zero residential lot transactions in the first 6 months of 2009, Q3 is off to a good start. Based on available data, here is what I can make of the transactions in July:

Ryder Homes has stepped into Shadow Ridge (Pyramid Hwy north of Calle de la Plata), purchasing 52 finished lots and 10 partially completed homes from Bank of America (which foreclosed on Syncon Homes). Word on the street puts the finished lot value at $25k per, which provides an average of $115k for the partially completed homes. I wonder where that puts a value for the remaining 126 paper lots still owned by B of A?

Lewis Operating Corp. has purchased a substantial portfolio from Landsource Communities Development LLC out of bankruptcy. Including:
  • Pioneer Meadows Village II – 34 finished lots in Spanish Springs for $25.5k per lot.
  • Damonte Ranch Phase 5 – 214 mapped lots and 410 paper lots in south Reno. Nothing to back this up, but the math works out perfect at $10.5k for mapped (includes water) and $4k for paper. Hopefully the applicable credits were included, considering all the off-sites and grading completed.
  • Copper Canyon – 102 finished lots and over 100 paper lots in Dayton. Even if the paper lots were free, that would put the finished lot cost below $20k per; my guess is somewhere around $16k finished and $3 paper.
Does this mean the positive indicators over the last few weeks are finally leading to money coming off the sidelines? At these values it’s hard to see how anyone could get hurt…