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Vacancies Up At Strip Malls, Regional Malls

Because of this blog and other projects I am working on— I don’t get out much these days. But when I do manage to escape the cage, I’ve noticed more and more empty storefronts in business districts, strip malls, and regional malls around the Chicagoland area. It’s not like I specifically look for them either. Even my father noticed it as we drove back from breakfast this morning. “Look at all those empty stores,” he remarked, as we drove through the downtown area of one of the western suburbs.

So I wasn’t too surprised when I came across a piece by Illaina Jonas of Reuters UK, which said the second quarter was the worst quarter for strip malls in 28 years due to store closings and cutbacks. Using data provided by real estate research firm Reis, Jonas wrote this past Monday:

Strip malls, which are usually anchored by grocery or drug stores, saw average vacancies spike 0.5 percentage points to 8.2 percent, a level unseen since 1995, according to the report released on Monday…

For the first time since 1980, more space became available to rent at strip malls than was rented out – about 3.2 million square feet more. Part of the available space came in the form of 5.7 million square feet of new development that came on the market during the quarter.

Looking For A New Hangout?
Jay & Silent Bob From “Clerks 2” (2006)

Jonas talked about the sources of the strip mall woes. She wrote:

A growing list of retailers shuttered stores ahead of lease expirations or chose not to renew leases, and as newly completed space hit the market without signed tenants…

Consumers are constrained by increases in food and energy costs, as well as the cost of servicing debt run up during the housing boom. In addition to cutting back on clothing, jewelry and nonessentials, they have turned to lower-price grocers such as Wal-Mart at the expense of the upper end usually found at strip malls, such as Whole Foods Market Inc., Reis said.

It’s not just the strip malls that are hurting. The Reuters reporter noted:

Vacancies at regional malls rose 0.4 percentage points to 6.3 percent, the highest level since the first quarter of 2002, according to the preliminary results.

The result of growing vacancies, Jonas said, was downward pressure on rents charged by landlords.

Not a good time to be a mall tycoon…

Source:

“US retail property 2nd-qtr worst in 30 yrs - Report”
Ilaina Jonas
Reuters (UK), July 7, 2008

FDIC Ads: Should We Be Worried?

Leafing through the June 30 issue of Time magazine, I stumbled upon an advertisement from the Federal Deposit Insurance Corporation, or FDIC…

For those readers not familiar with the FDIC, their mission, according to their website, is to preserve and promote public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $100,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

Now, the FDIC says the ads were meant to commemorate the seventy-fifth anniversary of its creation as an “independent agency” of the U.S. government. However, some suspect there may be an ulterior motive for the ad program. Keep in mind that back on February 26, I discussed in a post how the fourth quarter of 2007 was the worst bank and thrift performance since the fourth quarter of 1991, whereas the FDIC classified 76 banks as “problem” institutions for the quarter (up from 65 a quarter earlier). In addition, it was revealed that the FDIC was looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

Additional justification for the FDIC to roll out a “reassurance campaign” appeared in the following months. On June 5, John Poirier of Reuters talked about an appearance by Federal Deposit Insurance Corporation Chairman Sheila Bair on Capitol Hill, and wrote:

An increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending, Bair told a Senate Banking Committee hearing on the state of the banking industry.

“There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past,” Bair said. “Uncertainties in today’s economic environment continue to pose significant challenges for the banking industry, households, and bank regulators.”

So far this year, four small U.S. banks with deposits insured by the FDIC have failed, up from three in 2007. The agency last week boosted its list of troubled banks to 90, which have a combined $26 billion in assets.

Ironically, the FDIC ad I came across featured a photo of the $100,000 Series 1934 Gold Certificate featuring the portrait of President Wilson, the largest denomination of currency ever printed by the Bureau of Engraving and Printing. Nothing more comforting than seeing the words “insuring” and “protecting” next to the image of a U.S. gold certificate with the phrase “one hundred thousand dollars in gold payable to bearer on demand as authorized by law.” Too bad those dollars sitting in banks across the United States haven’t been backed by the precious metal since 1971, when President Nixon abandoned the Bretton Woods Agreement and effectively took the U.S. off the gold standard. As the U.S Treasury says on its website:

Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything.

Oh, Tricky Dick, what another fine mess you’ve gotten us into…

Source:

“UPDATE 1-Bigger U.S. bank failures may be coming – FDIC”
John Poirier
Reuters, June 5, 2008

New Forecast: $1 Trillion In Losses From Credit Turmoil

According to Bloomberg today, former World Bank President James Wolfensohn is predicting that losses from the global credit turmoil may climb to $1 trillion. Wolfesohn, who was the head of the Word Bank from 1995 to 2005, said after addressing the European Pensions and Savings Summit:

“It does seem to be a major adjustment on any level. There may be a $1,000 billion worth of losses in it somewhere.”

He added that he “cannot recall anything similar, certainly in the last 30 to 40 years that I’ve worked.”

Bloomberg’s Brian Swint wrote:

The International Monetary Fund predicts that losses from the crisis, including those tied to commercial real-estate, may total $945 billion and says global economic expansion may be the slowest since 2003 this year. Wolfensohn said the fund’s loss forecast of about $1 trillion is now a “consensus estimate.”

Data compiled by Bloomberg as of this morning shows the world’s biggest banks and securities firms have so far reported credit losses and writedowns of about $310 billion linked to the U.S. subprime meltdown.

Now an advisor to Citigroup, Wolfensohn concluded:

I’d have to say in my working experience, this is a different sort of crisis, largely because of the extent of the overhangs in financial markets. I don’t think in my working lifetime, I’ve seen challenges to the major institutions in terms of writedowns and impact on market capitalization.”

Source:

“Wolfensohn ‘Pessimistic’ as Financial Losses Rise (Update1)”
Brian Swint
Bloomberg, April 28, 2008

Latest U.S. Economic Forecast: Apocalypse

Peter Brimelow from MarketWatch talked about Harry Schultz, the highest paid investment consultant in the world, and his International Harry Schultz Letter this morning. For those of you not familiar with Mr. Schultz, I wrote about him back on December 13:

Have you ever heard of Harry Schultz? I sure have, and to this day I am still in absolute awe of the money this man earns. Mr. Schultz, publisher of the International Harry Schultz Letter, is the highest paid investment consultant in the world at $3,500 an hour (or $4,900 an hour if you require his services during the weekend).

Brimelow, in “Schultz still sees an apocalypse,” wrote that since Schultz declared a “financial tsunami is upon us” in the December issue of his investment newsletter, the Dow Jones Industrial Average has lost some 2,000 points. According to Brimelow:

So I checked to see if Schultz is any cheerier.
Answer: No.

The MarketWatch columnist talked about Schultz’s latest U.S. economic forecast. He said:

Schultz writes: “It’s a derivative crisis, stupid!… 9,000 U.S. banks failed in 1929-1932; look for new records… Hyper-inflation is a distinct possibility; stay awake!”

Among his more colorful recommendations: “Buy a few local non-rare gold coins of whatever country you are in for emergency/barter use, smallest denominations… Keep 6-12 months cash at home/ office/ lawyer-doctor office. Pretend an emergency is coming, because it may be.”

According to Brimelow, Schultz recommended traditional inflation hedges that were popular in the 1970s: art, commercial property that yields certain income, and farm land. In addition, Brimelow noted that:

The HSL section called “Actions To Take - In A Nutshell” epitomizes Schultz’s combination of sensational and shrewd. It begins: “The global derivative/credit crisis is nearing breaking point. Take immediate measures to safeguard your assets before it becomes too late, due to sudden (bank/government) restrictions on cash withdrawals, wire transfer limitations, the loss or recall of credit facilities, frozen fund redemptions, foreign exchange controls, etc…”

This outlook is consistent with what Schultz was predicting in his December newsletter. From MarketWatch on December 13:

Among other interesting ideas raised by Schultz in his intense, somewhat terrifying introduction: recession, possibly depression; bank failures; exchange controls; housing prices down by 50%; credit card company failures; money market fund dangers; tripling of U.S. jobless numbers; federal bail-outs for Fannie Mae.

Apocalypse, indeed.

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

Grantham: ‘Most Important U.S. Financial Crisis Since World War Two’

Jeremy Grantham, chairman of global investment management firm Grantham, Mayo, Van Otterloo & Co. and overseer of $157 billion, had a stark warning for Bloomberg readers Wednesday (much obliged, Financial Armageddon). He warned, “This is the most important U.S. financial crisis since World War II.” The crisis stems from a global credit crunch brought on by the U.S. housing slowdown and ensuing subprime debacle. As a result, Grantham said that the U.S. economy is likely to enter a recession. He added that present conditions are worse than the savings and loan crisis of the eighties, which cost U.S. taxpayers more than $160 billion. The money manager explained:

The S&L crisis was parochial in comparison. This is the first one that is global; it has tentacles everywhere.

Furthermore, Grantham said credit problems are likely to spread beyond subprime mortgages to commercial real-estate loans and debt used to finance private equity transactions. As quoted by Bloomberg:

Private-equity deals will be in trouble. They were under-researched and overleveraged, and we had reached a level where the junkiest possible companies were selling at high prices.

Grantham wrote in his latest quarterly letter to investors that private equity “is the most underappreciated risk of all and is likely to be the center of another phase in the crisis.”

Because of the crisis, the head of the Boston-based firm told Bloomberg readers to shun stocks and switch to cash. From his Boston office, Grantham warned:

Don’t be a hero. Move to cash and let the other guys fish around for the bargains in the wreckage.

“Don’t be that guy!”

The 69-year-old money manager said he expects stocks to reach a bottom in 2010.

Grantham correctly predicted the crash in technology stocks two months before the bubble burst in March 2000. Back on June 13, 2007, I talked about the legendary value investor, who wrote to shareholders back then that we are now witnessing the first global bubble in history, covering all asset classes. He said:

From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it’s bubble time!

The value investor added:

Everyone, everywhere is reinforcing one another. Wherever you travel you will hear it confirmed that “they don’t make any more land,” and that “with these growth rates and low interest rates, equity markets must keep rising,” and “private equity will continue to drive the markets.”

Paulson Predecessor Says U.S. Recession Likely

In Sunday’s Financial Times (UK), former U.S. Treasury Secretary Lawrence Summers said that the odds now favor a U.S. recession that will slow growth significantly on a global basis. Summers, who served with the Clinton administration and now teaches at Harvard University in addition to serving as a managing director at hedge fund D.E. Shaw Group, concluded that the U.S. economy will stall out, based on the following:

1. The U.S. housing slump marches on.

Several streams of data indicate how much more serious the situation is than was clear a few months ago. First, forward-looking indicators suggest that the housing sector may be in free-fall from what felt like the basement levels of a few months ago. Single family home construction may be down over the next year by as much as half from previous peak levels. There are forecasts implied by at least one property derivatives market indicating that nationwide house prices could fall from their previous peaks by as much as 25 per cent over the next several years.

2. The U.S. financial sector will be rocked— hard.

Second, it is now clear that only a small part of the financial distress that must be worked through has yet been faced. On even the most optimistic estimates, the rate of foreclosure will more than double over the next year as rates reset on subprime mortgages and home values fall. Estimates vary, but there is nearly universal agreement that – if all assets were marked to market valuations – total losses in the American financial sector would be several times the $50bn or so in write-downs that have already been announced by big financial institutions. These figures take no account of the likelihood that losses will spread to the credit card, auto and commercial property sectors. Nor do they recognise the large volume of financial instruments that depend for their high ratings on guarantees provided by credit insurers whose own health is now very much in doubt.

3. Credit, necessary for economic expansion, will become tougher to come by.

Third, the capacity of the financial system to provide credit in support of new investment on the scale necessary to maintain economic expansion is in increasing doubt. The extent of the flight to quality and its expected persistence was powerfully demonstrated last week when the yield on the two-year Treasury bond dropped below 3 per cent for the first time in years. Banks and other financial intermediaries will inevitably curtail new lending as they are hit by a perfect storm of declining capital due to mark-to-market losses, involuntary balance sheet expansion as various backstop facilities are called, and greatly reduced confidence in the creditworthiness of traditional borrowers as the economy turns downwards and asset prices fall.

Add the following:

Then there are the potentially adverse effects on confidence of a sharply falling dollar, rising energy costs, geopolitical uncertainties especially in the Middle East, or lower global growth as economic slowdown and a falling dollar cause the US no longer to fulfill its traditional role of importer of last resort.

And you have the recipe for an economic recession in the United States. Summers said:

Even if necessary changes in policy are implemented, the odds now favour a US recession that slows growth significantly on a global basis. Without stronger policy responses than have been observed to date, moreover, there is the risk that the adverse impacts will be felt for the rest of this decade and beyond.

Storm Brewing For U.S. Commercial Real Estate Sector?

A lot of media attention has been focused on the plight of the U.S. residential real estate market. But where is the U.S. commercial real estate sector headed? Will it follow housing’s lead down? By all appearances, commercial real estate has performed admirably. New York-based real estate research firm Real Capital Analytics noted commercial property sales hit $401 billion through October 18, outpacing last year’s $359 billion total. The U.S. Commerce Department said construction spending on office buildings, shopping centers, and other private, non-residential projects jumped 15.2% in August. The commercial sector has been immune to the residential mortgage mess because for the most part, buyers and sellers are more sophisticated, and they have more financial flexibility and resources to ride out credit market turmoil, experts told the Associated Press on October 22. Bernard Baumohl, managing director of New Jersey-based Economic Outlook Group, said, “It’s a different animal than the nonresidential construction business with the direct relationship between banks and business leaders, not banks and homeowners.” The National Association of Realtors’ chief economist Lawrence Yun spoke at this past weekend’s NAR convention in Las Vegas and said, “Despite some initial concerns, there have been no serious capital problems for institutional-grade properties, and most of the commercial market is performing well even though some private transactions have been cancelled or postponed.” Fundamentals remain strong with rising rents and occupancy levels expected to continue, especially in metropolitan areas. Yun said, “Vacancy rates should be gradually declining in the overall office, industrial, retail and multifamily sectors during 2008, reflecting the underlying demand for space in a growing economy. Areas with strong job growth will see the healthiest commercial markets.” Also, commercial markets are not in oversupply mode. “There’s plenty of excess capital that wants into real estate, especially in metro areas,” said Dan Fasulo, managing director of Real Capital Analytics. Finally, Yun noted that foreign investors, attracted by the weakened U.S. dollar, are pouring funds into the U.S. commercial sector. “Foreign investors are looking for good returns in a historically stable economy, and account for nearly 10 percent of total investment in U.S. commercial real estate sectors.”

Yet, some think the U.S. commercial real estate market is headed for a downturn. A report released Wednesday by the MIT Center for Real Estate suggests that the commercial sector may already be in transition. Prices in the third quarter were down 2.5%, the first drop in 4 years. MIT is suggesting that the new data signals not only the end of the 5-year boom for U.S. commercial real estate, but that weakness in the housing market is spilling over into commercial real estate as well. The center’s director, David Geltner, said in a prepared statement:

The fall in our index is the first solid, quantitative evidence that the subprime mortgage debacle, which hit the broader capital markets in August, may be spreading to the commercial property markets.

A new report from McGraw-Hill Construction also points to a slowdown in the sector, with commercial construction spending forecast to fall 6% next year from 2007’s record level.

Then there is the issue of commercial mortgage-backed securities, or CMBS. On November 12, the Financial Times (UK) said yields on commercial mortgage-backed securities have soared to levels not seen since the late 1990s, “indicating that they are seen as riskier.” The Federal Reserve notes that CMBS makes up 27% of the $3 trillion in commercial and multifamily development mortgage loans still outstanding, up from 4% in 1990. As the Financial Times explained:

Securitisation has allowed riskier, more leveraged purchases because the lenders originating the loans did not have to carry them on their balance sheets. As lenders rushed to cash in on the boom in the US commercial real estate market in the six to 12 months before the credit squeeze hit in July, underwriting standards declined and upped the risk of defaults, people in the industry said… In the third quarter, the average loan was 118 per cent of the property value, according to Moody’s, which includes expectations of properties’ incomes over several years in their calculations.

Sally Gordon, Moody’s head of commercial property research, told the Financial Times that level of leverage is “really kind of creepy.” In addition, consider the following from Monday’s edition:

Recent loans often assumed that the real estate market would get stronger, and there were a growing proportion of floating rate loans being issued. Even since the squeeze, loan-to-value ratios have barely fallen, while interest-only loans have actually risen, according to Reis, a real estate data firm. Some have already suffered the effects of fears over the kind of loans they are securitising, and have struggled to sell the bonds they are issuing. Wachovia, the biggest issuer of commercial mortgage securities in the US, according to Commercial Mortgage Alert, was hit by a $488m loss in the last quarter in the value of commercial mortgage securities that it could not sell.

Regardless, the recent performance of the U.S. commercial real estate sector may stall anyway as the U.S. economy sputters. “Commercial typically follows the national economy,” said Lawrence Yun at the National Association of Realtors’ industry conference.