What Are The Economists Telling Us?

This is where emotions come face to face with reality.  The economists actually count the tea leaves.  The rest of us know what we feel from 10% unemployment, from a sagging residential real estate market and a collapse in many sectors of commercial real estate.  Stuart Hoffman, PNC Chief Economist told us towards the end of last year that we would see a U-shaped recovery.  According to Stuart, things are going just fine, thank you.  He cites six straight months of personal income growth.  Personal consumption has increased for five straight months.  According to the Case-Shiller Index, house prices have been rising now for seven straight months.  Even more exciting is our rising household wealth during the past year.  Add to that an expanding manufacturing index, and he suggests that hiring can’t be too far behind.  Lastly, don’t forget that GDP grew by 2.2% for Q3, 2009, and by 5.9% for Q4, 2009.  Since Stuart’s report went to press we have new data showing a down-tick in February for home prices and the number sold.  According to the Wall Street Journal, 3/24/10, inventories of existing homes increased 9.5% at the end of February to 3.59 million available for sale or an 8.6-month supply.

Stuart cites Florida as being a market that is particularly hard hit.  Just recently I was down in The Villages doing some appraisal work in the hospitality industry.  There I found median home prices falling from $185,000 in 2006 to $135,000 today which isn’t as much decline as we’ve seen in other markets.  The volume of sales which was averaging around 300 houses per quarter in 2005-2006, is now down to around 125 houses per quarter.  The man-made retirement community had 35,000 homes in it as of December 2008, with 70,000 residents.  As home sales rapidly decline in number, the retirement-age population is no longer replenishing itself.  According to the STR Report, average annual hotel/motel occupancies in this market are at 44% with RevPAR (revenue per available room) a dismal $36.44.  And yet, PKF Hospitality Research just announced that U.S. hotels “should” enjoy double-digit growth by 2012.  The trouble is, what do we do in the meantime?

Guess where the economy is booming right now?  You’re right, it’s Washington, DC.  Unemployment there is 6% with rapid job growth during the second half of 2009, with the Obama Adminstration ramping up.

Jack Van Berkel, President, Real Estate Services, Grubb & Ellis, reported to no one’s surprise that occupier demand plunged in all categories of commercial real estate last year.  He  compared the current downturn with the deep cycle of the early 1990s. With unemployment holding stubbornly high, the commercial real estate market is suffering.  Banks are not selling their REO properties as would be expected.  They’re hanging on for better times.  Those in the market for debt instruments are finding bargains in the CMBS (commercial mortgage backed securities) market.

Why Doesn’t This Feel Like a Recovery?

It’s the unemployment, the overhanging debt and the racking up of deficits by the government.  The national debt is at $12.6 trillion.  I know, it’s just a number.  Debt now represents 7% of total tax receipts, and it’s expected to go to 11% in the next few years.  There is talk about Moody’s lowering the US Bond Rating from Aaa.  Get this, Moody’s is pleased that we only budgeted to spend $3.8 trillion this coming year.  Most of the economists and the stock market for that matter do not seem to be bothered by the rising debt levels.

BUT WHAT IF WE CAN’T SELL THE BONDS TO FUND THE DEBT?

A week ago, the Health Care Bill passed.  I figured there would be an emotional upheaval in the country, and I’ve been worried about the mounting debt now for some time.  Well, I don’t think this is Armageddon as yet, but it isn’t looking pretty.  On Wednesday, March 24, 2010, the news of two weak bond sales had not caused widespread public alarm.  Bond investors had avoided two major Treasury Department auctions, and there was one more to go on Thursday, March 25, 2010.  The total bond issues for the week were $118 Billion.  Investors failed to absorb 5-year Treasury Notes, pushing rates on the 5-year note to 2.59% from 2.42%.  The rate on the 10-year Treasury Note also rose from 3.69% to 3.90%.  The Thursday auction was for $32 billion in 7-year notes, which also received a lukewarm response.  In order for the U.S. to borrow $1.5 trillion a year, the amount required is around $29 billion per week.  At the very least we’re seeing the 10-year rate go up which is also pushing mortgage rates up.

Health Care Bill

With the passage of the Health Care Bill, we will be immediately faced with tax increases.  The actual health care benefits will not begin till some time in 2013 or 2014.  Speaking of the Health Care Bill, and I don’t claim to know much about what’s in it, but I have a pretty good idea that the “fixes” thrown in by both Houses of Congress added to the price tag.  Let’s get this straight, you’re paying through the “yingyang”  for your insurance because you have a serious health problem and really need the coverage, so the government will now charge a 40% penalty for your “Cadillac” plan.  Now that’s pain you can believe in.

Korpacz Real Estate Investor Survey Sees A Bottom in the Market

Overall Rates or Cap Rates as most people call them reached a low point in mid-2007 with an overall average of 6.87%.  After two years of recession and turbulence the rates appear to have topped out at 8.49%.  This quarter, Korpacz reports, the average rate has actually declined slightly to 8.42%.  Please be reminded that these are aggregate rates for all property types, and those involved in the Korpacz survey are institutional investors.  Some properties in NW Ohio are in this class, but many are not, and so Cap Rates will be higher for most properties here.  Although there has been stress and duress, it has not reached epic proportions as did the sub-prime crisis.  Delinquent CMBSs (commercial mortgage-backed securities) have risen from $20 billion in October 2008 to $65 billion in November 2009.  Those are the securities which were used to buy commercial real estate mortgages.  Default rates for commercial real estate nationwide have risen from 1.6% in 2008 to 3.8% in 2009.  Still, Korpacz feels that the fallout has not been nearly as bad as predicted.  A recovery appears to be underway.

LoopNet Sees Commercial Real Estate Prices Increase

LoopNet is reportiong that Moody’s/Real Commercial property Price Index has risen for the third straight month.  In fact prices according to that index rose 4.1% in December.  They remind us to fasten our seatbelts because the ride will be bumpy.  Overall, prices are down 38.7% from January 2008 and 40.2% from October 2007.

Think the recession is over?  For some people it is.  Someone paid $6,000 a square foot for a 5,500-square-foot condo with 20′ ceilings, overlooking Central Park.  The property was in receivership, but was owned by an Italian film producer who paid $10.4 million for it in 1997.  Donald Trump paid $5 million for it in 1997 and sold it to the Italian guy.

First Solar Hitting a Speed Bump?

A Wall Street Journal story in March 22, 2010 issue started with the sentence that the company’s reign as the sun king could be coming to an end. Harold McMaster started the company right here in Perrysburg, but then sold it to a Tempe, Arizona firm.  Their only U.S. plant is right here in Perrysburg, Cedar Business Park.  According to the story, First Solar has relied upon the German government subsidized market for at least 65% of their sales.  With Germany on an austerity program, First Solar sales have declined.  The stock is now down more than 40% in the last two years.  Shifting sales from Germany to the U.S. could mean lower prices.  Solar electricity sells for around $.15 per KWH here in the U.S. while in Germany it sells for $.35 per KWH.

Since some of our good friends are in the solar energy business, I thought it would be a good idea to dig a little deeper.  A white paper was written by he Enterprise Florida and GTM Research by Shayle Kann entitled, “Emerging Trends in the U.S. Solar Market”.  I’m just going to quote directly from the introduction.  “The U.S. is rapidly emerging as one of the world’s leading markets for solar power.  Installed costs for PV systems have fallen on average 3.6%/year for the past decade, making solar more affordable by the day.  Simultaneously, electricity prices have been rising and acknowledgment of the external costs of fossil fuel-based generation have been growing.  As a result, the U.S. PV market has grown at an average rate of 71% per annum since 2000, significantly outpacing global PV demand growth of 51% per annum.”

Feed-in tariffs (FIT) are fixed-rate contracts by countries and communities for solar electricity.  Germany and Spain have the highest which has encouraged their PV (photovoltaic system) market to grow from 44 MW in 2000 to 1260 MW in 2007.  In the U.S. the first to offer a FIT was Gainsville, FL, which offers a 20-year fixed rate contract as high as $.32/KWH.  Their capacity is 4 MW per year, and this is completely sold out till 2014.  The FIT starts at $.32 in 2009, and decreases to $.23 in 2016.  Seven states have FITs.  California is the largest, supporting 750 MW.  Their rate is also the lowest ranging from $.08-$.19/KWH.  Meanwhile, Texas, Vermont and Wisconsin have rates in the $.25-$.30 range.

Without getting too heavily into the details, the solar power market is said to be heavily handicapped by the global recession.  Project financing is a real problem.  So, although the long-term trends are extremely positive, the short-term does have some bumps in it.

To Get Away From it all, Try Chile

Did you wonder why the death and destruction toll in Chile was so minor as compared to Haiti when Chile’s earthquake was about ten times as strong.  The airport and many stores were open for business on Monday after the weekend quake.  Unlike Greece, Portugal and the good old USA.  Chile’s GDP has grown by 8% throughout the 90s and averaged 5-7% during the 2000s.  Up through 2006, Chile was reaping big profits from copper.  Rather than squandering the windfall on big-time spending initiatives, President Michelle Bachelet salted away the money for a rainy day.  When recession hit in 2008, money was available for a big stimulus plan.  They paid cash for their stimulus, what a novel idea.

Chile is a really free market with spending discipline which has resulted in outsized economic success.  Sounds like a winner to me.

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