Toledo Blade Sees Tough Sledding Ahead

Front Page, The Blade, November 7, 2009, reported that the
national unemployment rate of 10.2% has not been as high since 1983.  (The truth is that in 1983, unemployment
started the year at 10.4% and ended it at 8.3%. 
The Fed Chief was Paul Volcker who had the job of tamping down
out-of-control inflation.  He raised
rates almost non stop from the day Reagan was inaugurated in January
1981.)  Meanwhile, The Blade story
reported 190,000 being “thrown” out of work this October, with a total of 15.7
million workers out of work and 5 million putting in fewer hours.  The President reportedly extended
unemployment and the home-owner tax credits. 
It says that few economists thought either measure would do much
good.  They point out that the job losses
are from employers who are cutting expenses. 
The Blade seems to agree with economists who believe that unemployment
will go to at least 11% and stay there all next year.  That can’t be good for the elections in
2010.  Robert Reich, Clinton’s Labor
Secretary, chimed in that double-digit unemployment will force the President to
“do more to stimulate” jobs.  The Blade
said that without “government action” we’ll probably continue to lose jobs as
evidenced by the drop in consumer confidence in October.  They said that “shoppers’ sentiments were the
lowest they’ve been in three decades”. 
The final thought was that the “recovery balloon” is off the ground, but
might not be able to keep rising. 

Stuart Hoffman, PNC Chief Economist Sees Recovery Soon

Of course, by now we all know that the economy turned in a
3.5% growth rate for the third quarter of 2009, which
has been reduced to 2.6%. The PNC economist is predicting a “U”-shaped recovery, but a “W” is
possible.  The “W” is a double dip where
the economy turns in growth for a quarter then relapses before recovering again
later.  Hoffman said that we are
recovering because of the economic stimulus from both the Fed and the
Congress.  What must be done is to
successfully “hand off” the government-induced recovery to the private
sector.  We will see a business recovery
early next year, but unemployment will continue, however, we will see job
growth towards the end of the first quarter, 2010.

The September 2009, survey of small business was very
cautious with regard to jobs.  
Meanwhile, the Fed has lowered rates to zero.  He and most every other economist are predicting
that, “we will get inflation and massive deficits”.  Hoffman feels Ben Bernanke is an expert at
managing an economy.  He has high
confidence in him.  Interest rates are
expected to go up in the second half of 2010.  Business is the heart and soul of the economy.  Stuart is hedging a little bit in that his
predictions can come unglued if oil prices surge, there is a lack of lending or
a lack of job growth.  In some of his
final remarks he complimented John Maynard Keynes for his economic ideas.  He also commented on psychology and its
affect on the economy. 

In the question and answer phase, Mr. Hoffman addressed a
variety of issues.  Here is a compilation
of his answers and comments.

• The dollar will come down gradually, and this is
  not a concern.
   

• Housing values will be down 5% more in the
  Spring of 2010.  They will then be at
  2001 levels and will stay flat for five years before beginning to recover.  (Let’s see, the leading edge of the baby
  boomers will be 68 when real estate begins to recover.)
   
• Cap and Trade won’t pass.  It would be a big mistake if it did because
  it would be negative for the entire country.
   
• An increasing national debt will cause (a) the
  government to raise taxes and (b) inflation.
   
• The health care plan won’t work in reducing
  health-care costs.  (He didn’t opine
  whether it would pass or not.)  As of the
  writing of this letter, it has passed the House.

Stuart Hoffman feels strongly that we are on the leading
edge of a major economic recovery. 

Ted Anglyn, MAI, CCIM Also Sees Recovery

I had the pleasure of an eight-hour seminar with a  brilliant and highly experienced financial
analyst, appraiser, speaker and educator in Cancun, Mexico on November 11,
2009.  Ted Anglyn has worked for New York
Life, and has been called upon by the Obama Administration to advise the
government in the current financial crisis. 

The seminar opened with the five most dangerous words in
real estate, “This time it is different.” 
The current crisis began in February 2007 when there was a peak of
debt chasing deals.  CMBSs (commercial
mortgage backed securities) were the primary vehicle.  CMBS are the securities which were sold to
fund major commercial real estate deals. 
They were selling like hot cakes here in the U.S. and throughout the
world.  Today there are no sales of
CMBSs.  Today there is a lack of equity
investment and debt financing.  He
believes that commercial real estate values are down 45% in the last twelve
months.  Life insurance companies are
doing ok since they apparently didn’t get into the highly leveraged deals like
most everyone else.  97% debt and 3%
equity was chasing deals.  Loans were non
recourse with interest only.  Cap rates
were based on no amortization.  6% cap
rates were the rule, and lower.  Now
there is no money for the Class B and C properties.  There have been 120 bank failures this
year.  There were 25 in 2008 and 3 in
2007.  As of June 2009, there were
150,000 hotel rooms under construction in the U.S.  Those deals were made in 2007.  It takes five years to put a full-service hotel
deal together from date of beginning to opening.  It only takes around two years to put a
limited-service hotel deal together.

There will be $1.5 trillion of commercial real estate loans
coming due in the next three years.  The
policy for now is “pray and delay”. 
There is $700 billion of CMBS money out there right now funding
commercial real estate.  Remember, the
commercial real estate purchased with the CMBS and the securitized debt has
declined in value 45% the last twelve months. 
The reason is that these properties were valued with cap rates assuming
interest-only while today only amortized debt is available.  This alone would bring a cap rate from 6% to
10%. 
 

There were 300,000 foreclosures in the last six months while
retail sales have declined only 1% this year. 
This year, 45% of all real estate sales have been first-time home
buyers.  25% of all loans are FHA this
year. 

The U.S. is overbuilt. 
We have 23 square feet of shopping center space per person and 46 square
feet of retail space while in Mexico they have only 5 square feet of retail
space per person.  Debt is still
available for Class A properties. 

Borders will close 200 stores in January.  In January 2006, 2.1 million houses were
built, and as of May 2009, the figure was 532,000 and in September it rose
slightly to 600,000.  We need 1.1 million
to replace inventory, plus 200,000 second homes.  So, we just might see a housing recovery sooner
rather than later because the inventory is falling below that level which is
demanded as the population increases and older homes are taken out of
service. 

Take a deep breath. 
We’ve only just begun.  Ted told
me he believes that employment will turn the corner in March 2010.  He also told me that he believes that the
economy is on track to recover with its emergence from recession as of this
past quarter. 

An Eminent Domain / Right-of-Way Appraising Success Story

Earlier this year I accepted an appraisal assignment for a
property owner who had a strip of his 50-acre property taken to make way for a
new interstate interchange.  The taking
along his frontage was not just a strip of land, however, it was all of his
access.  After the take, the only access
to the property was an access easement through the adjacent neighbor’s property.  My client was elderly and accepted the
acquiring agency offer without question. 
Only very minimal damages were paid in return for taking virtually all
of his access rights.  To make matters
worse, the county property taxes were increased dramatically because in their
view he now was the proud owner of “interchange land”.  How was a person on fixed income going to pay
for such a massive tax increase?  My
appraised value took into consideration the subject’s commercial zoning, public
utilities, but with no commercial access. 
My client could possibly have sold to his neighbor to the north who has
a big commercial business operation, but it isn’t likely.  The final appraised value was based on
agricultural sales and property sales with commercial zoning without good
access or public utilities.

The good news was twofold. 
First, the county auditor immediately reduced the property taxes to the
level of my appraisal.  The second was
that the property owner submitted my appraisal to the acquiring agency which
has now agreed in writing to grant full commercial access to my client’s
property.  There will no longer be a
fence along the entire length of its frontage. 
He can now sell his land to a commercial user for commercial
prices.  How’s that for a happy ending?

Thieken Access Case

A landmark access case a couple of years ago established
that an eminent domain, right-of-way taking of access is not compensable if the
property owner still has direct access to a public roadway.  The law says that damages can only be awarded
if there is substantial or unreasonable interference with a property right of
access.  If a property has 100% access on
a major highway before the taking, but has right-in, right-out access after the
take, no compensation is available for damages. 
In this case the State installed curbing which restricted the access to
a 42′ curb cut resulting in a 30′ driveway. 
Once again, no damages if the state provides “adequate” access.  In this case there were two wide driveways
into the property from two streets, before, but only one after.  Still, the court said, “no damages”.  The same holds true if the access is changed
to a side street from a commercial highway. 
In the Thieken case the property owner was only able to win damages on
the basis that the taking caused damages to the remainder site as a result of
impaired maneuverability within the improved site.  This is called circuity of travel within a
site.  On the other hand, if a taking
causes the main body of traffic from a highway to take a circuitous route to
get to the property which had formerly had direct highway access, the property
owner is not entitled to damages for a change of access.   

The Auto Bailout, Is it Working?

First, lets take a little history lesson.  GM was founded by William Crapo Durant in
1908.  Certainly, he wasn’t going to call
his company Crapo Motors, so while most other auto companies are named after
their founder, GM became GM.  In 1931,
Alfred P. Sloan took the helm and built GM into the giant it was to become with
its numerous nameplates.  The concept
worked well until at least the 1960s when GM began to unravel. 

In February of this year a man named Steven Rattner was put
in charge of the Auto Task Force.  It was
essentially a group headed by Rattner, Tim Geithner and Larry Summers.  Rattner’s first reaction on beginning his
task was just how bad things had gotten at GM and Chrysler.  Chrysler had almost no new-car pipeline.  Both companies were facing liquidation, and
so the team began to consider the possibilities given a complete liquidation of
the auto giants.  The consequences were
too great to even consider.  The Bush
Administration kept both companies alive in December with $17.4 billion in TARP
money.  To make a long story short, the
task force fired Rick Wagoner, and although the specter of the government
firing an auto executive was upsetting to most of us, Wagoner did have to go,
that’s for sure.  The team fully
understood that the problems were a result of oil prices, the financial crisis,
the dollar value and the UAW.  The
Wagoner administration burned through $21 billion in 2008 and another $13
billion the first quarter of 2009.