Happy New Year

The Wall Street Journal trumpeted the good news. The Dow Jones is up 6% for the year. The S & P 500 came in dead even, same as it ended last year. Not that I’m any expert, but the Fed has been on an expansionary policy of unprecedented proportions. We’ve had QE1,  QE2 sprees of print money. And there are those who are saying that our U.S.A. Fed is spreading money around the globe to the tune of $24 trillion. That’s funny money, of course. The U.S. credit rating has been downgraded and our Government refuses to even consider bringing spending under control. The second half of the year was marked by incredible volatility.  The average swing on a daily basis during October and November was 270 points. There were some clear winners. If you held 30-year Government bonds you made 35%. Those holding McDonald’s stock earned 31%. Everyone, and I mean everyone says that a major problem during 2011 was the squabbling of Congress over the budget. Would they rather the Republican House had just rolled over and played dead? Some of us would have wanted them to go to the wall and not give in when they were having their debt-ceiling battle. The end result of all the fighting was a very meager “cut”, which wasn’t a cut at all. This will be illustrated later in this newsletter. All things considered, we weathered 2011 a lot better than many of us thought we would. If you predicted volatility, you were right on target.

Just recently, we received some wonderful news. The unemployment rate had fallen to 8.6%, a 2 ½-year low. This was a big headline in the Toledo Blade. The Blade said it was seen as welcome relief. Private-sector employers added 140,000 jobs, but the Government shed 20,000 jobs during the same period. I thought that employment growth at this rate was insufficient to reduce the overall unemployment rate. Then way down on page 2, after Mark Zandi of Moody’s Analytics bestowed his blessing, it was surreptitiously reported that 315,000 unemployed workers had stopped applying for jobs in November. What a shame, you decide to take a holiday breather from your arduous and depressing ordeal of applying for jobs, and they decide to drop you from the rolls of the unemployed. Doesn’t seem fair, does it?

Way down on page 2, the real truth came out. Having given the President his election-season headline boost, it’s time for truth telling. “Serious concerns remain about the economy’s ability to weather the financial and economic turmoil from abroad.”   “The public sector continues to shed workers.”   “Excluding hundreds of thousands who have left the labor force, the country has a backlog of more than 13 million unemployed workers, whose average period of unemployment is at an all-time high of 40.9 weeks.”   Doesn’t sound that much like good news does it?

At the same time, however, we are beginning to see glimmers of an improving jobs market. Initial claims for unemployment insurance fell by 19,000 to 366,000. This figure has stood stubbornly at 400,000 or higher for many months. Small business added workers in November after shedding jobs for five consecutive months.

From The Appraisal Institute Economic Seminar, Columbus, Ohio

• Interest rates are the lowest of the post-WWII period.
• Monetary policy is expansionary.
• Inflation is low.
• Uncertainty is high.
• Export growth is good.
• Business spending is solid.
• Inventories are low.
• Ohio has had a “v-shaped” recovery.
• The price of energy is going up.
• State and local finances are going down.

Honeywell CEO Speaks Up

The chairman and CEO of Honeywell, David Cote, told CNBC that major corporations are hoarding cash due to economic uncertainty. He said that regulation is proliferating while the overhanging national debt is holding down business investment. Cote ventured that if we could begin to get control of our Federal Government debt, the economy would take off like a rocket.

George Mokrzam, Huntington Chief Economist and Bob Bach, Chief Economist for Grubb & Ellis

………reported that Japan is getting back to business. The earthquake seriously disrupted the supply chain. George said that our GDP has now recovered to its pre-recession level. That’s called recovery. The next stage is expansion which is a lot tougher. GDP growth is expected to be slow, at a rate of 1.5% to 2% per year. There is a ton of liquidity in the marketplace right now. Bank reserves are high, which is a good thing considering the threat of a meltdown in Europe. Money supply growth is beginning to accelerate. Capital goods orders are up and consumers are spending. However, housing is flat. Disposable income is rising somewhat and affordability is historically high. Again, corporations are sitting on a ton of cash.

Bach told us that long-term rates can be expected to rise along with economic growth. The U.S. is suffering from a hangover from QE 1-2, aka printing of money. This will cause inflation. The rate on a ten-year Treasury is way down, but can be expected to rise along with inflation. So, overall, job growth can be expected to just keep pace with the labor force, leaving the unemployment rate flat at least for the next twelve months. Most of our job growth will be in health care and the Federal Government. Construction will remain very slow. A major plus is that the freight business is way up.

Other Year-End Economic News from John Kasarda and Kurt Rankin, PNC

In terms of cash in the hands of American corporations, they are sitting on $2.1 trillion while Japanese firms have amassed $2.7 trillion. Corporate balance sheets are very good. Corporations can afford to pay high dividends if they choose to do so. Stock values, however, are pessimistic. Stocks are trading at a 10 PE ratio while the rate was more like 20 at the beginning of 2010.

There will be no double-dip recession, but we can expect slow growth. It will be a half-speed recovery. Europe is a risk to the U.S. economy, but it is not what’s holding back the U.S. economy. Looking back to the last three recessions, after one year the economy had recovered what it had lost. This time around we are just now getting back after four years.

People feel 81% confident about their own economic health, but feel about 40% confident about the U.S. prospects. Consumers have a very negative attitude about the U.S. economy. Consumer sentiment is down, although the savings rate is up and so is unemployment since 2008. Consumers have been hit with a lowering of their disposable income. In all, Toledo has lost 15% of home values and 10% of its jobs. The U.S. has lost 5% of its jobs and 30% of home values.

Business lending is picking up just at the right time. Business is interested in borrowing right now in order to expand. Productivity growth is slowing, and as productivity slows, firms begin to hire. In the 3rd Quarter, the GDP improved. As a result, employment can be expected to ramp up.

What are the Prospects for Commercial Real Estate?

Commercial real estate prices increased 2.2% in October. This is the first increase since the CRE recession began in 2008. The reason is that investment-grade property has made a strong recovery and the overhang of distressed properties and foreclosures has declined. Of course, investment grade properties are the newer buildings in good locations. For the rest of the market, the performance has not been quite as stellar.

Reports are that the lodging industry has turned in a strong performance this past year. Again, the best performance has been in the upper-tier properties. They call these the luxury and the up-scale properties. Occupancies in these segments are topping 70%. Conversely, occupancies in the lower-tier segments will lag behind. The same holds true for markets. The top-tier cities are performing strongly while the opposite is true of lower-tier cities.

Meanwhile, investor sentiment remains at a very high level. The index is at 152 which is the highest level since 2004, other than the second quarter when it reached 164. This is despite headwinds such as the European debt crisis, Washington’s inability to get control of the budget and the downgrade of the U.S. credit rating. Still, jobs actually grew in August, September and October at a 241,000 jobs per month pace. Retail sales beat expectations with a year-over-year increase of 6.1%. Many, if not most, investors are extremely wary of micro and macro economic circumstances. They clearly see a great deal of risk in the economy, primarily due to the incredible mounting debt both in the U.S. and abroad.

In real estate, apartments are a safe haven. 45% of real estate investors believe the CRE values have not yet hit bottom, but apartments are another story.  Vacancy rates have fallen to 5.6% while rents have risen 2.4% to an average of $975 per month. Most apartment investors believe that now is the time to buy.

What’s in the News as the Year Comes to a Close?

According to the WSJ, Christmas came early for the U.S. steel industry. Rising sales of cars, farm gear and oil-drilling equipment are boosting the demand for U.S. steel. Prices are rising amidst increasing production which is a welcome change from earlier this year when demand for domestic steel was weak. There is good news near NW Ohio. Gerdau SA, Monroe, Michigan, will invest $67 million to expand production. They make steel for the aero-space and defense industries. Russian steelmaker, OAO Severstall doubled the size of their Columbus, Mississippi plant last month to the tune of $550 million adding 1.7 million tons to annual production. AK Steel with plants in Ohio is raising prices on benchmark hot and cold rolled steel used by the auto industry. Steel prices are up 25% since November 2. Hot rolled steel is now selling for $750 a ton compared to $600 previously. Total shipments by U.S. steel plants were 76.4 million tons the first ten months compared to 69.7 million tons over the same period in 2010. This year U.S. auto makers are expected to churn out 13.4 million vehicles as compared to 10.4 million in 2009. All of this is very good news if it continues, especially for NW Ohio. In fact, GM Transmission in Toledo just announced 150 new jobs at their Jackman Road plant. It’s been a long, long time since we’ve heard that kind of news.

Baseline Budgeting

For at least the last 20 years the Federal Government, aka the U.S. Congress and the President have engaged in a fiasco called baseline budgeting. This is a slight of hand trick wherein each and every Federal department is budgeted to increase about 10% per year no matter what. Let’s say that the Department of Education or the Department of Agriculture or Transportation is slated for a 10% increase and the politicians are calling for a 4% cut in the Transportation budget. The other party then screams bloody murder for the “cruel” , “brutal” cuts. No one argues that this is not actually a cut at all. Neither the politicians, nor the CBO will admit to the ruse. It’s like a giant conspiracy with everyone acting like they believe the cuts are real. The truth is that the horrible, draconian cut was actually a 6% increase. The last time the Congress decided to make a cut in the budget it amounted to $38,500,000,000, which sounds like a lot of money, but with baseline budgeting it wasn’t a cut at all. The budget was scheduled to increase and everyone knew it. We all know that Social Security and Medicare are going up like crazy every year, especially now that the baby boomers are reaching retirement age in large numbers. Ask yourself why the Department of Transportation or Education go up 10% every year when the states run these two sectors lock, stock and barrel. The Department of Transportation builds no roads and the Department of Education runs no schools. The figures below will illustrate:

Why the U.S. was downgraded:

• U.S. tax revenue: $2,170,000,000,000
• Federal budget: $3,820,000,000,000
• New debt: $1,650,000,000,000
• National debt: $14,271,000,000,000
• Recent budget cuts: $38,500,000,000

Let’s now remove 8 zeroes and pretend it’s a household budget:

• Annual family income: $21,700
• Money the family spent: $38,200
• New debt on the credit card: $16,500
• Outstanding balance on the credit card: $142,710
• Total budget cuts: $385

But remember, the family is budgeted to spend $3,820 more next year no matter what, so a cut of $385 only puts a very small dent in what they will actually spend. They will actually spend $41,635 next year and go into the hole $19,935. Their debt will be almost equal to their income next year. Pretty soon, you’ve got to figure that the credit card company will get tired of loaning them money, right?? Another way of putting it, “a trillion here and a trillion there, pretty soon, you’re talking real money”.

Were TARP and the Auto Bailouts a Success or a Failure?

Conventional conservative wisdom is that both of these programs were unqualified failures. In fact, in conservative circles, if you were in

favor of these programs you were the object of scorn and derision. Let’s take a look at the postmortems. TARP was a 2008 program where billions were loaned to banks whether they wanted it or not. More than 99% of the federal funds loaned out have been paid back. The Federal Government has recouped more than $244 billion of the $245 billion it loaned to these banks. In fact, the Government is expecting to make at least a $20 billion profit on the deal. Ohio’s own Fifth Third Bank has paid back $3.4 billion, the entire amount borrowed.

As to the auto bailouts, approximately one-half of the amount loaned has been paid back. The Government is expecting to lose about $14 billion on the deal eventually. It is also fair to say that many, many jobs were saved by the bailouts. Some estimates on jobs saved are as high as one million. Speaking on behalf of the Toledo Metro economy, I must say that were it not for the auto bailouts I hate to think what kind of shape we would be in here in Toledo. Would we be expecting 150 new jobs at the Jackman Transmission Plant? Would we be talking about a Jeep expansion on Willys Parkway? I think not.

This Report Has Been Brought to You by:

Robert D. Domini, MBA, MAI

Ohio Certified Appraiser, also Certified in MI and FL

We are a full-service real estate appraisal firm. Give us a call next time you need a real estate, equipment or a business appraisal. Remember we do appraisals for eminent domain takings and tax appeals.

Have a Wonderful Holiday Season, Happy Hanukah, Merry Christmas and a Happy New Year!!

My Head is Spinning

Remember the old guns versus butter argument? The Nazi war machine used the metaphor to promote the buildup of the German Army. Joseph Goebbles and Hermann Goring popularized the argument stating that guns would make them powerful while butter would make them fat. Our government, in effect, debates the issue non-stop. Do we spend our money (as a percentage of GDP), on the military or on the production of goods? Or, to give it a sharper edge, do we spend our money, more on defense or on domestic programs, (otherwise known as social spending)? While attempting to build the Great Society, President Lyndon Johnson was frustrated that he was forced to spend on the Vietnam War and the Cold War instead of on social programs. Ultimately he fulfilled his social agenda by establishing long term programs that would be paid for by future generations. Today we have a class of big spenders who don’t really care what the dollars are being spent for, just so they get to spend. The taxpayer’s dollar is being used to buy a vote. The old butter versus guns argument is of no consequence.

There are those who argue there is a multiplier effect to social spending. The big spenders are making the argument today that for every dollar spent on social programs there is a multiplier effect of $1.85. But remember, that dollar has to come from one of two places. Sixty cents of it comes from someone else, an endangered species known as a taxpayer. The other forty cents comes from borrowed funds, likely the Chinese. The 60 cents that comes from another person is a “transfer payment”. It has a net effect of zero on the economy because it is taken out of the hands of one person and is put into the hands of another. This concept is also known as redistribution of the wealth. The borrowed forty cents is even more onerous. It has to be repaid, with interest.

Or, wait a minute, if we need more money, why not just print it? That’s a tool which has been available to the Fed now for many decades, traditionally used to regulate the economy. The idea was to use it to speed up the economy by “buying” securities, and vice versa. As a tool for fine tuning the economy, monetary policy has performed admirably. But, during the last two years, the Fed’s monetary policy has been elevated to an entirely new level. The Government has spent $3.2 trillion more than it has taken in. $2.3 trillion of the shortfall has been paid with printed money. You might ask where our Fed has gotten the money since they really don’t have any money of their own. The answer is that they have diluted the equity of the dollar.

“Government Spending Cuts Have Hurt the Economy”

It’s being said now. It was said after the economy took a nosedive in 1936 costing FDR his Congressional support. The reason given then and ever since was that the Republicans forced spending cuts which killed the Golden Goose, aka the economy. Not true. Spending during the New Deal period was never cut. Fast forward to 2011. The Congress and the Administration just signed an agreement to cut spending… some time down the road. No cuts have been enacted yet. In fact, the Federal Budget rises about 7% per year on its own. It’s called Baseline Spending. Per yesterday’s WSJ, Federal spending has risen from $1.7 trillion in 2007 to $3.5 trillion in 2009 when the emergency stimulus bill was passed to pull us out of this recession. It is the famous $787 billion. But spending has stayed at that same “emergency” level ever since. In fact, it’s been at $3.6 trillion the last two years. So, Congress has avoided passing a budget these last two years why? So they could just keep spending at the same “emergency” level. So, folks, we have a permanent $787 billion stimulus plan in our budget whether we like it or not.

How’s this Impacting the Financial Markets?

About two weeks ago Congress and the President made an agreement to raise the debt ceiling by $2.5 trillion, thereby taking that issue off the table until after the elections late in 2012. In effect, the President does have a blank check to spend that money as he sees fit between now and the next time it comes up. This is why the S+P lowered the U.S. credit rating. The spending cuts are down the road, just like everyone thought they would be. As a result of the downgrade, investors are becoming more risk averse. Investors are flocking to the ten-year T-bill, bringing that rate down. The 10-year T-bill rate is the rate most often used to help set mortgage interest rates. Yet, foreclosures are surging. One out every three residential sales is a foreclosure.

For commercial real estate the market has a split personality. Some investors feel that with real estate at least you’re getting a hard asset, not a piece of paper. Yet, the negative news is piling up for the first two quarters of this year. Growth is averaging just 0.5%. There is now a much greater risk premium in the investment markets. Capital is going to be even more difficult to raise. Consumer spending is sure to become weaker and the ripple effect will follow on down the line to commercial real estate. Shoppers staying home will reduce retail spending, thereby increasing vacancies. Demand for goods and services will decline, reducing factory utilization and the demand for office space. Despite the negativity, compared to the alternatives, CRE, commercial real estate, is still a hard asset. Solid properties with good leases are still a commodity in demand. Cap rates had been falling the last year to eighteen months, and we don’t expect them to turn around and go the other way.

The markets are complaining about political gridlock. What do you suppose they mean by that? The left staked out a position where they did not want to cut any spending, but rather to raise taxes. The right refused to raise taxes and insisted on cutting spending. The agreement made laid out plans to cut spending very gradually. The national debt will not be coming down any time soon, so I wonder what they mean by gridlock, and what they really wanted Washington to accomplish.

Investors are lamenting that Washington had a scuffle over raising the debt ceiling which caused, they say, a decline in consumer confidence. They feel that the economy was just picking up a head of steam when old Washington started going at it. The problem is the economy had a head of steam based on printed money and that didn’t even goose it up enough to lower unemployment. Now that we are no longer printing money, the economy is left to survive on its own, and the road is pretty rough.

Could it Be The End for Gold?

On Wednesday, August 24, the price of gold declined a stunning 5.6% following a 1.6% drop on Tuesday. The price of gold has been on a non-stop run now for several months and almost literally for years. Glenn Beck says in commercials that he started buying gold at $300 and started recommending it at $900. I can remember Dock Treece, Sylvania, Ohio, recommending gold four or five years ago. A few months ago he mentioned to me that he wasn’t feeling as bullish about gold any longer. That was about $400 ago. Just remember, no one can perfectly predict the future, though many of us try, don’t we?

Investors Betting on QE3

As insane as it would be, there is actually talk of more printing of money. If they do it, buy, buy, buy stocks, that is. Regardless the fundamentals, the stock market just seems to love printed money.

Florida Real Estate

Notice I haven’t been talking about that much the last couple of years? Of course I’m licking my wounds. There went my retirement nest egg; at least for now! Who would have ever imagined that the downturn would go this long and this deep? Not I. Well, we’ve got a real deal for you in Bonita Springs right on an inlet of the Gulf in a building for which I am on the Board of Directors. A penthouse is coming up for foreclosure sale soon, and it could be really soon, like next week. Let me know if you’re interested and I can let you know the details.

CoStar says the era of “Extend and Pretend” is Coming to an End

This is good news, they say, for investors because for so long, investors in prime properties have not been able to find many foreclosure opportunities. Well, now the banks are finally facing up to the reality of their credits. This is really big. They are expecting between $40 and $60 billion in distressed transactions in 2011. They are forecasting $850 billion in loan maturities this year. Remember a few years ago we learned that investors were paying premiums for commercial real estate based on cap rates calculated from interest-only loans. When banks stopped making interest-only loans, the cap rates immediately increased a couple of hundred basis points. They have since come down, but today CRE values are considerably down from the highs of a few years ago, specifically 2005-2007. With values down, investors are being forced to come up with more cash or face foreclosure.

And Now for the Good News

Jones Lang LaSalle is saying, “Overall net absorption is positive, leasing volume is steady, oversupply is gradually disappearing and prime rents are pushing up as the supply gap for prime assets deepens in many core markets.”

Believe it or not, second quarter 2011 commercial and multifamily mortgage loans were up over 100%. They say that lending was way down in 2009 and 2010, but this year the markets have been much better. Those performing strongest are health care, hotels, retail, multifamily and offices. The office recovery has been uneven, performing admirably in what are known as gateway cities. The rest of us, well, we’re not so good. The U.S. CBD office vacancy rate is down from 14.6% to 13.7%. Apartments have actually been on a tear now for some time.

From the Author

This update has been brought to you by yours truly,

Robert D. Domini, MBA, MAI

President, Continental Valuations, Inc.

Remember us for your real estate appraisal needs; purchase, refinance, tax appeals, business planning, estate and trust, eminent domain, etc.  We can handle your property appraisals most anywhere in the U.S.

File Property Tax Appeal Now

Attention Commercial Real Estate Owners, the time has come to take a hard look at your commercial real estate value as it compares to your tax value.  Many, if not most, properties have experienced a decline in value the last two to three years.  For most properties nationwide, the decline was at least 18% combined for 2008 and 2009.  For prime properties there was a slight improvement during 2010, but for tax-appeal purposes the appraised value must be as of January 1, 2010.  Most counties will mail out the appeal forms to you or they are available on their website.  The county auditor’s offices throughout NW Ohio I have called on the phone are most helpful without exception.  The property owner or an “interested” party such as the president of a company can fill out the form, or your lawyer can do it.  It’s a simple one-page form, but be prepared; they ask you to state your opinion of value for the property. 

Question, 1:  Do I need to file an appraisal at the time I file for the appeal?  No, but the county auditors do prefer that your appraisal accompany the appeal form.  Question, 2:  Will I need an appraisal when I have my hearing before the Board of Revision?  Not really, but having an appraisal done by a professional appraiser is highly recommended, especially for commercial property.  Question 3:  Do I need to appear in front of the Board of Revision?  Yes, either you or your lawyer needs to be there to argue your case.  It’s also very beneficial to have your appraiser there as well. 

Conclusion:  Give Bob Domini a call at (419) 873-0412, or send an email to bobdomini@bex.net so we can give you an idea if you have a case worth pursuing. 

Financial and Economic News as of mid-January

Let’s start with the good news.  The Dow Jones is now at 11755 which is pretty good since it was at about 11000 last October.  At a recent meeting of the National Association of Home Builders, as reported in the WSJ, the consensus opinion was that the market was still extremely weak and prices were still falling.  Still, optimism among builders is starting to grow as they see gains in retail sales and the sale of cars.  Employment is holding pat for now.  Yet, the builders will start construction on 575,000 single-family homes this year, up 21% from last year.  The 2005 peak for housing starts was 1.7 million, so we have a ways to go to reach that level.  It’s the same with the Dow.  It was 14164 in October 2007. 

Meanwhile, oil prices have reached a two-year high at $90 a barrel, the highest level since the October 2008 crash.  Meanwhile, gold is selling near $1,400 an ounce.  The 10-year Treasury bill is at 3.35%, up from about 2.4% last October.  The 15-year mortgage rate is 4.2%, also up from a low last November of 3.71%.  Some brokers were quoting as low at 3.5% at the time.  Yet, the CPI change since November 2009, is only 1.1%.  Am I missing something here?  Is it fair to say that skyrocketing oil prices can wreck havoc with a nascent economic recovery?  Just asking. 
 

Oh, and I don’t mean to be negative, but what’s this news about food prices?  Global harvests are down.  Prices of corn and soybeans were up 4% yesterday.  Corn futures are up a mere 94% from their June lows and our government continues to mandate that we use corn for our auto fuel.  It isn’t like we didn’t see that one coming.  Prices for finished goods are holding pat while prices of industrial materials are up 12% for 2010.  Hmm, so why are consumer prices flat while manufacturing costs are skyrocketing?  Because the sellers of consumer goods simply can’t sell their goods if they raise prices, that’s why.  Tame inflation can’t possibly last forever. 

Here’s one for you.  Illinois is raising their state income taxes 67% and their corporate taxes 45%.  Now, that makes a lot of sense.  Wisconsin is licking their chops.  The U.S. continues to buy its own Treasuries with IOUs, flooding the system in liquidity.  Always remember, when the Fed floods the system with liquidity, stocks will go up.  Lesson Number 482.  In the face of all this, many “experts” such as those at Goldman Sacs, believe that we will have a year or two of recovery with tame inflation.   I hope they’re right. 

What’s Happening in Commercial Real Estate?

In this section I will be “borrowing” liberally off the web.  According to those who track CRE (commercial real estate) sales, the third and fourth quarter deal volume had returned to pre-recession levels.  CRE sales volume rose from $22 b. the first quarter to $36 b. the fourth quarter.  Sales for 2011 are expected to rise another $9 b.  Total volume was 80% greater in 2010 than it was in 2009.  CMBS (commercial mortgage-backed securities) sales for 2009 had nearly disappeared, but did reappear in 2010.  CMBS volume for 2010 reached $16.1 b. after a paltry $5 b. in 2009.  We thought those had died and weren’t coming back.  Those are the bugaboos that helped take the housing market down, only they were the commercial version.  For $16 billion of those to be sold after the losses sustained during 2008-09, the market must have a renewed appetite for risk.  Either that or the securities were being loaded with a much better quality of properties. 

Bloomberg is reporting that  the U.S. office market has logged in its first gain in occupied space since 2007.  Office buildings added 2.5 million square feet of occupied space during the fourth quarter.  According to Reuters, office rents rose and vacancies fell during the fourth quarter.  This represents the first improvements in these categories since 2008. 

I read somewhere that the sale of resort properties is on the rise.  The locations mentioned included both northern and southern locales.  The article was about houses on the water for the most part, although there was a mention of the Poconos.  Also mentioned was Hilton Head and West Palm Beach.  There was no mention of Fort Myers Beach or Bonita Springs, FL, and particularly no mention was made of condo properties.  A great many baby boomers now set to retire and begin collecting on Social Security will soon be scrambling for their place in the sun, or so we would presume. 

Here’s one for you.  What’s happening in the Chicago industrial market, the land of the astoundingly increasing taxes?  The word in the industrial leasing market is that during the last six weeks deals are actually getting done, whereas during 2009 and most of 2010, there was a lot of tire kicking and not much on the substance side.  Deals actually getting signed are in the 200,000 sf+ range.  And what about Detroit, the land of Kwame Kilpatrick?  Let me just say that the last time I worked north of the city in the suburban industrial market, I think I was out on 23-Mile Rd. at SR 53 in Shelby Township.  This was an area where upscale warehouse-distribution and light manufacturing with great highway access was booming during the good times.  It was absolutely dead about 18 months ago.  We don’t have any specifics, but word is that the Big Three are on the move.  We’ve been hearing this in the Toledo, OH market area as well.  Chrysler is throwing out more than hints that there will be some major manufacturing initiatives in Toledo which will begin very soon.  We can only imagine what the impact of a recovering auto industry will have on Detroit.  This time the gains will be consolidated for the good of the overall community under the leadership of Dave Bing. 

Dr. George Mokrzan, Senior Economist with Huntington Bank

Dr. Mokrzan spoke to a group of appraisers back in December, and he was expecting a big dose of inflation this year from the QE2 move of the Fed back then.  He was also afraid of the sovereign debt crisis, the expiration of the Bush tax cuts, higher taxes and continuing deficit spending.  Sounds like one of those uncivil conservative Republicans.  He was also afraid of Medicare, Medicaid and Social Security, not necessarily in that order.  By 2035, he believes that the two Meds will swamp us under.  Back then he said the industrial Midwest was having an industrial recovery.  Total payrolls in the Midwest took a big dive about equal to the early 1970s and 80s.  There was a double-dip in the early 1980s.   2010 was a good year for employment growth in Indiana and for Ohio to a lesser extent.  Exports for the region had a V-shaped recovery.  Exports from January 2009 to September 2010 were up 57% in the Midwest region.  Ohio is the #4 exporting state of machinery and #7 overall.  Most of Ohio’s exporting business goes to S.E. Asia, the Middle East and South America.  Commercial construction has hit bottom.  The three Cs manufacturing level has recovered to pre-recession levels.  Cleveland and Cincinnati have had the strongest manufacturing growth.  Columbus is more of a service economy. 

Bob Bach, Chief Economist with Grubb & Ellis

Bob said he thought rates would stay low for a while.  We still have excess capacity which should keep inflation low.  Someone asked if we could possibly go the way of Greece, and Bob said we possibly could, but the U.S. debt was still in demand worldwide.  The Fed says long term unemployment will remain in the 5%-6% range.  Low interest rates should stimulate sales of commercial real estate.  The last economic recovery in 2005-6 was in housing.  In 2000 it was technology.  What will it be this time?  Ohio is down 423,000 jobs or 8% since the recession began.  We have had a nice rebound, but it’s up only about 10% of the loss.  National office vacancy peaked in the second quarter of 2010 at 17.9%.  It was 18% in 1992.  It would be 22% if you count all the shadow space, which is space under lease but not being used.  We will have a half-speed recovery in the office market.  In 2011 the recovery will be mostly absorption of shadow space.  Offices close to mass transit will do the best.  Some cities have light rail throughout their business district.  Class A rents will be very slow to increase.  The Midwest office market depends upon employment growth.  Big cities have greater demand.  Examples are San Francisco, Austin and New York.  Supply dictates vacancy rates right now. 

Medical office demand should be on the upswing considering the increasing demand by baby boomers.  Industrial vacancy peaked at 10.9%, and this rate is coming down gradually as rents increase gradually as well.  Retail sales are starting to come back.  The savings rate is now 6%.  Retail vacancy is about 11% right now.  REIS says it is not coming down while CoStar says it is.   Apartments are doing well.  Home ownership peaked at 69%.  It’s down to 66% now.  Vacancy is way down from 7.8% to 5%.  For industrial, global trade is very strong right now.  Commercial real estate volume has almost doubled in absolute dollars from recession lows.  Class A properties are up 30% in some markets.  For commercial real estate, we need CMBS, commercial mortgage-backed securities, to come back and they are.  Good companies can’t get financing.  Private equity coffers are full with $300 billion sitting on the sidelines.  One borrower recently had a $2.4 million apartment deal he wanted to get financed.  He had a $60 million net worth and $40 million in liquid assets and it was very difficult to get him financed.  Bob said CMBS sales were going very well for the seven big investment banks like Citi, Goldman, JP, Chase, Morgan Stanley and UBS.  Freddie Mac sold 4 securitizations this past year and they’ve all been oversubscribed.  There’s lots of money out there which is a big change since the beginning of 2010. 

Kevin Blakely, Chief Risk Officer, Huntington  National Bank

Investment banks got started in 1998.  They do not take deposits.  They borrow money and make deals for a quick profit.  They do not keep debt or assets on their books.  In 2003-04 the Fed raised interest rates, but 10-30 year Treasuries would not go up.  Why?  China bought up our debt and kept them up.  Commercial banks offered teaser rates.  Lots of liquidity was out there with low rates.  Values went up, up, up.  In 2007 subprime mortgages began to go south.  The question is, “how do you create AAA securities with junk?”  How do you make chicken salad out of chicken shit?  In May 2007 at the first signs of cracks in the foundation, the subprime market was dead.  The banks got caught with lots of the junk they were waiting to sell off as securities.  Banks were holding securities in their investment portfolios.  When we say “securities” we’re referring to MBS, mortgage-backed securities.  Rotten loans were packaged as securities and received AAA Moody’s ratings and were sold off throughout  the world.  Problem is our banks were holding the rotten securities when they crashed.  Money market funds were also holding the securities. 

In May-June 2008, investment bankers convened for a meeting in Frankfurt, Germany.  It was then that the banks realized what was happening and they lost trust in one another.  They immediately froze up lending, hoarded liquidity.  The economy seized up.  Then on September 15, 2008, Lehman collapsed.  At first the Government was going to buy debt, but they couldn’t price it.  they just handed money out to the banks.  National City collapsed.  They were big players in the subprime.  There was a run on the banks.  Corporations were calling their money.  TARP said “NO” to Nat City.  Wachovia had too much subprime as well.  They were also cut off. 

The Treasury and the Government “gave” money to the banks.  TARP did work.  TARP money is being repaid.  The Government is getting repaid and they have warrants they are selling.  Thank God, Barney Frank and Congress rode in on their white horses to the rescue. 

Dodd-Frank is the national full-employment act for Federal Government employees who usually join certain organizations who usually vote a certain way.  Get it?  (Some of the foregoing thoughts were those of the author, not Mr. Blakely) 

Dodd-Frank will generate 243 new regulations in the next two years, all directed at the banking industry.  80 new regulations per year for three years will be a big drain on the banking industry.  It will be a tremendous expense to the lending industry forcing them to hold 9-10% in reserves, up from 6%.  This will really crimp bank earnings.  “How are banks ever going sell stock?”, Blakely asked. 

There are now four mega-banks.  The government is trying to keep them from growing, to force them to hold more capital.  They hold $2-$3 trillion in assets.  They will take the economy down if they fail.  Dodd-Frank might be right.

The Ireland banks got bigger than the country.  Ireland can not bail them out, so the EU has to. 

Blakely feels commercial banks should be split from investment banks. 

Cyber attacks on banks could take them down.  Bank failures are now the small banks.  The FDIC problem bank list was 180 as of mid-December.  Barney received $106,000 from the banks and real estate firms.  He received $265,000 from the securities industry.  Small mortgage brokers are being swamped under by regulation. They are beginning to fear for their survival. 

The home ownership decline has contributed to a rise in apartment demand.  Employment growth should also stimulate apartment demand.  Unemployment among the college educated is only 4%.  There is a big demand right now for student housing.  The U.S. population is growing, but the rate is slowing.  China is about 75% of our rate.  China’s birth rate will slow greatly in the future.  The populations in Europe and Japan are shrinking mightily.  We are the only country which is holding its own.   Our birth rate is two per couple.  Japan’s is 1.37. 

This update was brought to you by Robert D. Domini, MBA, MAI, Continental Valuations, Inc., state certified appraiser in OH, MI, FL and IN.     

As we close in on the end of 2010, we are thankful for all of the good news this past year. The Dow Jones Industrial Average and the S & P 500 Index are up about 10% for the year due largely to corporate profits which have been strong. Interest rates have stayed low throughout the year, but housing and commercial real estate have yet to recover. Worldwide economic news is throwing off mixed signals. The Dow lost ground in November, although it is off to the races thus far in December. Unemployment is still hanging at just under 10% with the “real” unemployment rate somewhere towards 17-18%. Global markets are reeling with the Euro dropping like a rock and European stock markets down at least 5% for the month of November. Ireland, Italy, Spain, Belgium and Portugal could be going the way of Greece. Germany is trying to hold up the entire continent single handedly. The dollar has risen 7% against the Euro since the beginning of November which may seem like a good thing, but it will have a dampening effect on exports. The Euro crisis does affect the U.S. directly because 19% of our exports are to the 27 countries in the European Union.

The U.S. economy is beginning to feel better about itself, having turned in a nice performance at the shopping malls during the holiday weekend. A full house of conservatives is anxious to have a crack at reducing the deficit this coming year. Taxes are another matter. If anything is to be done to extend the Bush tax cuts, it needs to happen during the lame-duck session prior to January 1, 2011. The problem is that the President is hoping to allow some of those tax cuts to expire. The delay in making this important decision has caused a great deal of uncertainty, and that’s why most of us are not hiring, nor are we willing to invest in new plant and equipment. The small-business community is already feeling the effects of all the turmoil in the medical insurance business. Some of us have already received premium notices with increases in excess of 40%.

Having said that, this Country was spilling red ink for at least twelve years up to the beginning of World War II, and then, as the war effort ramped up in 1941 and 1942, something miraculous happened. Despite the overwhelming debt from government spending for well over ten years, our economy took off and dug its way out of the Depression. I believe strongly that our U.S. Constitution is still the law of the land, although it’s being challenged on a daily basis. We must defend our Constitution at all cost, and we will weather this storm. America will rise again, and when it does, it will be with a strength and fury no one can possibly imagine!

The date was September 17, 2008, and the website of a company named, “Residential Home Funding Corporation” was offering a most interesting product. The website read, “A Government-regulated agency, Fannie Mae, has developed innovative mortgage products for borrowers who have difficulty raising adequate funds for their down payment. These mortgage programs will pay up to 97% of the purchase price and the other 3% can come from a wide variety of sources including loans from a 401-K or a credit union. No Doc Loans are available. One type is a NINA loan where no income or asset information is provided or verified. There is also a Stated Income Verified Assets loan where income is stated, but not proven. No proof is required. This flexible program allows foreign nationals with no income and no credit history in the United States to buy property.”

Fannie Mae and Freddy Mac were GSEs, government-sponsored enterprises. They were not only government sponsored, they were government controlled. They were a policy extension of the U.S. government. The U.S. Congress determined long before George W. Bush was President that it was their goal to make home ownership affordable to most American families.

The loans were originally packaged by Fannie Mae and sold off as securities. They were known as Mortgage Backed Securities. Later, the larger banks joined the fray. They purchased subprime loans from brokers and smaller banks, packaged them and sold them as MBS (mortgage-backed securities). Rotten loans were packaged into securities, bonds if you will, and sold with AAA Moody’s Ratings throughout the world. In fact, the bonds were even insured by such companies as AIG. It was a no-lose proposition.

The other villain was the top management of the financial corporations. The really big players were the investment bankers such as Bear Stearns, Lehman Brothers, Merrill Lynch and Morgan Stanley. The CEOs of these firms made huge bonuses by taking obscene risks with their shareholder’s money. When they collapsed, guess who was left holding the bag?

Have no fear, the taxpayer will always step up and come to the rescue. In September 2008, the U.S. Government, Joe Taxpayer, took over complete ownership of the Fannie and Freddy.

Just four months following the bombing of Pearl Harbor by the Japanese, the U.S. Navy was busy building tank landing craft for the invasion of the European Continent. At the time, construction was underway on the Ohio River by Marietta Manufacturing Company, a company owned and controlled by the Navy. The Navy desired to acquire the neighboring 153 acres for assembly of prefabricated ship hulls and as a Naval Distribution Center. In a 3-page order, a District Judge from West Virginia declared that the United States was taking the property by eminent domain and that the price was to be $47,320. According to the order the price was determined by the Secretary of the Navy to be just compensation. This was a heavy-duty transaction because the order came directly from the Secretary of the Navy under the authority of the U.S. Attorney General and the U.S. Congress. That’s $309 per acre, and the deal was signed into law by Harry E. Watkins, District Judge, on April 28, 1942.

One month later an addendum was filed by the seller which was later attached to the deed. In it there was a very strange (offensive) deed restriction. The property was not to be sold or transferred to any person of African birth or descent for a period of 50 years.

Despite the U.S. Constitution and a Supreme Court Decision, the acquiring agency, the U.S. Navy, in time of war, acquired personal property by fiat with a local judge signing the order. The value, “just compensation” was determined by the Secretary of the Navy, the acquiring agency. The Fifth Amendment to the U.S. Constitution states that, “no person shall be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.” In 1897, a U.S. Supreme Court decision affirmed the duty of the state to see to it that just compensation is paid for property taken by eminent domain.

A Real Property Consultant is not a real estate appraiser. A consultant is sometimes hired for property tax appeals of large commercial or industrial properties. The consultant will give advice to the property owner on all aspects of the appeal process. He/she can attend hearings with the owner and make arguments to help the client’s cause. However, the consultant cannot render an opinion of value as though he is an unbiased professional.

A Real Estate Appraisal Consultant can render an unbiased opinion of value. He/she can advise the owner as to the appeal process. The appraiser can attend hearings and speak on behalf of his appraisal, but he must be careful not to be an advocate for the client’s issues and causes. The appraiser must never accept a fee that is contingent on value or a particular result. The fee must be paid for services rendered, only.

The real estate appraiser can check the records against the actual property to determine whether there are any factual errors in the Auditor’s appraisal. What kind of factual errors can be made? Your building could have a major roof leak and serious interior damage. The property could have been vandalized. The foundation may not be secure. Additionally, the square footage could be wrong. The site size could be incorrect as well.

The appraiser can take pictures of the damaged areas and secure estimates to repair damages which are usually a deduction from the value.

While the appraisal is being prepared, the appraiser often has enough data available to make a reasonable determination of value even before the written appraisal is completed. So long as the appraiser has file material available to support his opinions, he can verbally inform the property owner that his value is equal to or greater than the Auditor’s value and an appeal will likely be unsuccessful.

When the appraisal is complete and presuming that the appraiser’s value is less than the Auditor’s appraised value, then it can be used as evidence in the Board of Revision hearing. The appraiser will appear before the Board and present his appraisal. The property owner and/or his attorney must be present during the hearing.

Most Boards hearing property tax appeals appreciate an appraisal and an appraiser which are both clear and concise. The Board will most appreciate a straight-forward sales comparison approach for smaller commercial properties. In cases of leased properties or properties where income is an important factor, an income approach is usually developed.

A brief and simplified explanation of the appraisal is always appreciated. If the Board requires greater detail, they will ask questions.

Some appraisals for tax appeal are for large and complex properties. Even appraisals of complex properties should be simplified as much as possible.

Continental Valuations can provide either a Real Estate Appraisal Consultant or a Real Estate Appraiser for your project.

By now many of you know the segments of the story that I have been telling from the book Atlas Shrugged. John Galt and his fellow business owners, investors, inventors and creative thinkers had largely given up the fight and abandoned their businesses. Each of them had come to a place they called Atlantis which was actually a valley in the mountains of Colorado which was not visible from the air and which had no roads leading to or from it. The group in this small village was relatively small, but its inhabitants were the inventors and the creators of their industries.

The outside world was crumbling. The captains of industry had just simply vanished into thin air, and each of them had not sold their businesses, they just abandoned them. As soon as they left, the looters fed on the carcasses until there was almost nothing left. A few of the business people made a valiant effort to hang on, but it was a losing battle. One of them, Dagny Taggart, who ran the Taggart Transcontinental Railroad, was trying to hang on. She followed John Galt into the valley and crashed her plane there. The business owners were all there to greet her when she recovered from the crash. They nursed her back to good health, but as soon as she recovered from her injuries, she was ready to return to the outside world to try to stop the madness before it destroyed everything. As she was about to leave the valley in John Galt’s plane, she said to him, “I started my life with a single absolute: that the world was mine to shape in the image of my highest values and never to be given up to a lesser standard, no matter how long or hard the struggle”.

Back in the outside world, the leaders were proudly developing what they called Project X which turned out to be a weapon based upon sound waves that could destroy almost anything within a range of 100 to 300 miles. The sponsors were Dr. Floyd Farris, Dr. Stadler, Wesley Mouch, Orren Boyle and Mr. Thompson. Together, they felt that this new weapon would give them unrestricted control and the ability to take over any and all businesses of their choosing.

Meanwhile, Dagny was once again walking on the streets of New York, and managed to find her way back to her office in the Taggart Transcontinental Railroad Building. When she arrived at her office she found that a Mr. Cuffy Meigs had assumed command. He was the Director of Unification, the Washington representative in charge of the Railroad Unification Plan. And, the story goes on from there. The parasites and the leaches were closing in for the kill and she, Dagny, was just now getting a good taste of the reality she had been denying now for a very long time. The story will continue in the next issue, but, again, if you would like to learn the “rest of the story”, you should read Atlas Shrugged, by Ayn Rand.

Respectfully,

Robert D. Domini, MBA, MAI

Certified Appraiser in OH, MI and FL

CONTINENTAL VALUATIONS, INC.

Paul Krugman and Tim Geithner are Wrong About 1937

According to a CBS News report, nearly all of the $862 billion in stimulus funds signed into law in February 2009, will have been awarded as of the end of September, 2010.  Yet, also according to CBS, the funds awarded have not yet found their way into the economy because most of it has been awarded to cities which have not been able to work through the processes such as bidding. Now, the Government is proposing a new $50 billion shovel-ready infrastructure plan, call it Stimulus II. 

In 1932, the U.S. was in the same boat as the rest of the world in terms of economic distress.  Our unemployment rate climbed to 24.9% as FDR was being elected but most of the world shared a similar predicament. Denmark led the way with 30.8% and Japan had the low of 6.8%.  Fast forward to 1937; the U.S. was registering a much-improved 13.2% unemployment rate, but that was after more than four full years of New Deal spending.  The rest of the world, in 1937, was generally at about the same place we were. Norway led the pack at 26.9% and Japan was still low with 3.7% unemployment. Our trading partners, such as Canada, were then at 12%, the UK was at 10.5%, Australia 9.3% and the World Index posted an unemployment rate of 10.1%.  Then in 1938, our unemployment numbers surged to 19.8% while the rest of the world was either standing pat or up only slightly.  No one was up by 50% like we were.  In fact, the average for 16 nations in the League of Nations was only 11.4% that year. 

Krugman and Geithner would have you believe that FDR slacked off on the fiscal stimulus in 1937 which caused the economy to crash in 1938.  Well, let’s see.  After five years Roosevelt ratcheted up taxes to 79% for the top income earners, he raised corporate and excise taxes, he doubled the national debt, and federal spending tripled.  U. S. unemployment reached 19.8% in 1938 and hit 20.7% in April 1939. 

Geithner is no big fan of extending the Bush tax  cuts even though he never has been very fond of taxes in his personal life.    He was pushing the $50 billion shovel-ready program.   Krugman claims that FDR pulled back fiscal stimulus too soon in 1937, and this caused the nosedive in 1938.  Is this true?      

It’s true that the elections of 1938 did not go well for the Democrats.  They lost a lot of seats in both Houses and many Democrats who were opposed to the New Deal were reelected.  In the U.S. we hold our Congressional elections in November, and those elected do not take office till the following January which would be 1939.  The new Congress shut down the WPA, CCC, and other relief programs after they took office in 1939.  In 1937, Roosevelt refused to cut spending after extensive debates with then Treasury Secretary Morgenthau.  In fact between 1933 and 1939, federal expenditures tripled.  There is no evidence that Roosevelt cut back spending in 1937. 

If you’re wondering why the economy took a dive in 1938, consider this.  FDR ordered an FBI investigation to look into a criminal conspiracy by business to hold back capital spending.  Roosevelt’s anti-business tirade went so far as to levy a tax on retained earnings. (i.e.  a tax on money already taxed).  Imagine that.  FDR went on a tear against monopoly power.  He attacked Henry Ford and steelmaker Tom Girder and the sixty families that controlled most of the large businesses in those days.  It’s true that FDR talked about balancing the budget in 1937, but spending was never actually reduced.  When Roosevelt saw the economy fall into a tailspin early in 1938, he immediately went on a $5 billion spending spree.  In point of fact, the New Deal had engaged in deficit spending, right out of the chute in 1933.  In May 1939, his Treasury Secretary, Morgenthau, wrote in his diary, “We have tried spending money.  We are spending more than we have ever spent before and it does not work.  And I have just one interest, and now, if I am wrong somebody else can have my job.  I want to see this Country prosper.  I want to see people get a job.  I want to see people get enough to eat.  We have never made good on our promises.  I say after eight years of this administration, we have just as much unemployment as when we started, and an enormous debt to boot.” 

So, Paul and Tim, please don’t worry.  Your Government is not likely to slack off on its spending in the near future.  Even if the Republicans take both Houses of Congress next month, they will never be able to override a Presidential veto to cut back on spending.  Deficits are scheduled to exceed $1.5 trillion as far as the eye can see, and the national debt has now reached $13.5 trillion. 

The Depression ended on December 7, 1941, with the attack on Pearl Harbor.  Unemployment went from 14% in 1940 to less than 2% in 1943.  Spending for the war was incredible.  The total for 1946 was $62 billion or 30% of GNP.  It is truly amazing that this Country was able to spend so much money for so long, and eventually come out of it.  Why did war pull us out of the Depression when all of the “make work” spending of the New Deal was never quite able to do the job?  The reason is that people had something to work for that they could believe in.  Everyone was working, man, woman and child because the cause was to do or die.  Instead of business and the Government being constantly at odds with each other, they were arm in arm for the common cause.  It is amazing what the USA can do when we all finally decide to join the same team.  This will happen again someday and we will once again be united in a common cause.  Hopefully it won’t be another World War that unites us.

Unemployment Rate Redefined

Did you know that the official Bureau of Labor Statistics definition of unemployment was changed in 1994?  I must give credit to a well-known financial guru for this revelation.  Most people have heard somewhere that not all unemployed persons are included in our current unemployment rate published by the media.  What most of us didn’t know is that the definition was changed in 1994, probably to make the politicians look better.  It is commonly known that the unemployment rate does not include persons no longer looking for work, but who are technically willing to work and have looked for work in the past.  In other words, the disenchanted unemployed are not being counted.  We’ve all heard comments that if all unemployed people were counted, our unemployment rate would be 17% right now.  If we used the same criteria used in the 1930s, then our unemployment rate may very well be the same as it was during the Depression. 

The Depression gets personal for me since my mother was thirteen in 1936, and both parents died suddenly that year leaving eight children orphaned.  The three older boys were off working for WPA or the Army, which left five younger sisters home alone.  The oldest was only eighteen.  The youngest was 10.The girls all quit school to help make ends meet.  Each of them did odd jobs to bring in a dollar or two.  Since they had no money, the only way to heat the house was to search for coal along the railroad tracks.  Their mother left them a garden which provided year-around food.  They made money babysitting or whatever they could find, and when they were around fifteen they were off to find real jobs.  A job in those days paid about $2 per week.   So now, get this picture.  Five teen-aged girls were left home alone, orphaned and although Government programs proliferated and percolated throughout the country including WPA, AAA, CCC, NIRA, there was not one iota of help for those five little girls.  Oddly my mother lived to be nearly 86, and never lost her love or admiration for FDR.  Go figure.  Must have been those fireside chats. 

Who is John Galt?

Envision this scenario…

They had all of the power and yet they had nothing.  (A parasite cannot live on its own.  It needs a host upon which to feed.)  They passed laws, they filed indictments in court, they taxed and they regulated until there was no chance at all for businesses to survive.  Worst of all they raped and looted the carcasses of the fallen businesses.  One by one the producers, the inventors, the investors who built their businesses brick by brick began to fade away and vanish from the face of the earth.  Not one even bothered to sell or give away their businesses.  They simply abandoned them. There was Ken Danagger’s coal mines, Ellis Wyatt’s oil wells, Fransisco D’Anconia’s copper mines, Hank Rearden’s steel mills and Richard Halley, the composer’s music.  All of them, all of the enterprises, the factories, the steel mills, the offices, the rail lines, the mines, were all abandoned allowing nothing but weeds to grow in their place. 

Where had they gone?  It was a place, which among themselves, they called, Atlantis.  It was located somewhere deep in a valley nestled in the mountains of Colorado where no one could ever see it or find it.  It was a hidden place not even visible from the air, with no roads leading to or from it.  It was where they had all gone to wait for the engine to choke and sputter to its deadly end.   This was a place where they had all withdrawn so that they could no longer be used.  It was a place where they could prepare themselves for their eventual return.  Who was John Galt?  He had been a young inventor of the Twentieth Century Motor Company.  He designed a motor which would transform energy.  The invention was never allowed to see the light of day. That’s when Galt disappeared.  He was the first to “drop out”.  Then came Lawrence Hammond of Hammond Cars, Dwight Sanders of Sanders Aircraft, Judge Narragansett of the Superior Court of the State of Illinois and Midas Mulligan.  Atlantis was a place where each of the so-called former titans of industry had certain duties to keep their little village running.  Of course, the source of power was John Galt’s motor.  Some tended to the gardens while others worked the construction crews.   This little place even had automobiles, and numerous inventions available to provide an almost limitless quantity of creature comforts in a little valley with very few inhabitants. 

As each of them left, the outside world, in fact, did collapse.  There was no longer a host upon which the parasites could feed.  At first the angry mobs delighted in looting the abandoned businesses, but then with no trains running, no factories operating, no coal, no oil, no steel, no copper, no cars being built, there was simply no fuel to keep the economic engine running.  Slowly, but surely, the cities began resembling England after the bombings of World War II.  The rest of the story is to be continued in a later issue….or….you can read about it yourself in the book “Atlas Shrugged” by Ayn Rand.

Snapshot of Current Financial Headlines

Corporate profits are surging.  Companies in the S & P 500 have posted quarterly profits 38% higher than in the same quarter a year ago.  The WSJ said that big companies are turning in the outsized profits through personnel cutbacks, closure of less-productive plants, shifting of work to cheaper locales and streamlining their operations.  Shouldn’t they have been doing that anyway?  Companies intend to stay lean and mean until further notice and do not intend to add employees, invest in new product lines or add plant and equipment.  In other words, they will continue to hang on to their cash like they have been doing.  Did you know that the stock market gains in September were the highest since 1939?  (Notice how often you now see references to the 1930s in the media.)  The S & P 500 were up 8.8% for the month of September.  All of this has occurred in the midst of an unemployment rate expected to rise to 9.7% for September and the number of net new jobs is projected to be zero.  What’s going on?  Stocks are surging and corporate profits are setting records, and their sales are not just from exports.  Yet, unemployment is holding stubbornly high while the housing market and the commercial real estate markets appear to be experiencing continued weakness.  Perhaps we’re learning that our large businesses can get along without as many employees.  We’re also finding that they will move their plants to where the costs are lower and the regulations are less onerous.  Some say the actual number of unemployed in the U.S. is upwards to 17%.  With unemployment this high many businesses will be hurt and so will local governments.  It appears to me that those of us in middle America will continue to struggle until further notice. 

Meanwhile, many mid-sized and smaller businesses are unconvinced that the recession ended as of June, 2009.  Many businesses feel they cannot afford to expand plants and equipment or hire more people right now due largely to the uncertainty of health care expenses and taxes.  Many businesses feel that they cannot expand as long as unemployment remains high and consumer sentiment low.  In real estate, this translates into a lower level of leasing activity for offices, retail and industrial properties. 

Commercial Real Estate (Good?) News

Real Capital Analytics is reporting that the total value of distressed commercial real estate is currently at $187 billion, up 12% from a year ago.  They are also reporting that the decline in commercial values seems to be over in most markets.  In fact, they say, values are actually increasing in some markets.  Delinquencies on construction loans experienced their first quarterly drop since mid-2006.  The end of the slump may be near, they say, but let’s see what happens next year when $600 billion in loans come due. 

In another report, Reuters is reporting that commercial real estate prices increased 2.2% in the second quarter, the first gain in two years.  Hotels.com is reporting that hotel room rates have increased 2% over the previous quarter, the first time there has been an increase since 2007.  The top five markets are New York, Orlando, Chicago, San Francisco and Las Vegas.  In other news, Abu Dhabi’s room rates have fallen 46% in the past year.   They had what Allen Greenspan used to call, “irrational exuberance”. 

The vacancy rate for U.S. shopping centers rose to 10.9% from 10.0% a year ago.  Office vacancies rose to 17.4% for the same period.  All things considered, there is a little positive news here and there with a fair amount of negative news thrown in for good measure.  The net result is that there is still no solid evidence that we are on an upward trajectory.