ISM Manufacturing Index

The Institute for Supply Management’s purchasing managers index rose in January to 58.4, its highest level since August 2004. Index values above 50 indicate an expanding manufacturing sector, while values below 50 indicate contraction. The index is a composite of nine other indexes including new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders and import orders.

The production index increased to 66.2, its highest level since April 2004 while new orders, a leading indicator of production, rose to 65.9. Inventories remained below 50, a sign that production activity will remain strong for the next few months as manufacturers replenish their depleted inventories. A recovery in the manufacturing sector will boost demand for manufacturing properties, and it translates into more goods flowing through corporate supply chains, which will support demand for warehouse/distribution space.

Source: Institute for Supply Management, Grubb & Ellis


This information is provided by Grubb & Ellis' Research & Knowledge Center

Good News Friday

The Next Big Thing - by Robert Bach, Senior Vice President, Chief Economist - Grubb & Ellis

I’ve been on the speaker circuit this month to present my outlook for 2010, and the question I get most often is: Where will the new jobs come from? Many people think the U.S. could be facing an extended jobless recovery, a double-dip recession or, at worst, a “lost decade” similar to what Japan endured in the 1990s. The questioner can’t visualize the next hot growth sector that will jump-start hiring and lead the broader labor market to new heights.

Maybe we don’t want a next big thing. The hot growth sectors of the 1980s (commercial real estate), the 1990s (technology) and the 2000s (finance and housing) turned out to be bubbles, triggering recessions and massive investment losses when they burst. Maybe we want more gradual growth across all sectors fueled by prudent lending standards, and that may be what we are going to get. According to a recent report by Moody’s Economy.com, “By year's end, all major industry groups will be expanding.” Job growth will be strongest, they say, in environmental services, medical services, biotechnology, restaurants, computer software & services and pharmaceuticals manufacturing. If there is a next big thing, it could be healthcare, but demand will be driven by underlying demographic trends (aging of the boomers), development of new treatments to keep people healthy, and an expansion of coverage to the uninsured, though what that will look like remains uncertain.

The labor market will recover at a gradual pace, and it will take several years to recoup the 8 million-plus jobs lost in 2008 and 2009. But the forecast by Moody’s Economy.com bears repeating: “By year's end, all major industry groups will be expanding.” It will be a start.

Outstanding Commercial & Industrial Loans

The value of commercial and industrial loans, i.e. business loans, on the balance sheets of U.S. commercial banks has declined consistently since late 2008. This seems to corroborate the view that banks aren’t lending. Indeed, a separate survey of banks conducted quarterly by the Federal Reserve reveals that banks have been tightening C&I loan standards or increasing spreads since late 2007.

But the survey also reveals that demand for C&I loans has weakened consistently since the middle of 2006. The same trend is evident in commercial real estate loans, with banks reporting tighter standards and declining demand for the past three years. The government debt and excess liquidity in the financial system that has built up since the recession began is like dry tinder. An economic recovery will bring stronger private sector loan demand and issuance, which could begin to compete with public borrowing needs and thereby ignite inflation.

Source: Federal Reserve, Grubb & Ellis

This information is provided by Grubb & Ellis' Research & Knowledge Center

Commercial Real Estate Vacancy Rates

The average U.S. vacancy rates for the four core property types – office, industrial, retail and apartment – continued to rise in the fourth quarter, but the rate of increase slowed for office and industrial. Vacancy rates last quarter increased by 30 basis points for office and 20 basis points for industrial compared with third-quarter gains of 50 and 30 basis points, respectively. This raises the possibility that the office and industrial leasing markets may bottom out as early as mid-year with modest, positive absorption possible in the second half of 2010.

In the office market, a prerequisite for this relatively early bottoming would be for employers to begin adding jobs in the first half of this year, which would also provide support for the apartment and retail markets. For the industrial market, continued improvement in the drivers of demand for industrial space – production activity, freight shipments and global trade – would help the market bottom out around mid-year.

Source: Reis, Grubb & Ellis

This information is provided by Grubb & Ellis' Research & Knowledge Center

Good News Friday

The Inventory Story - by Robert Bach, Senior Vice President, Chief Economist - Grubb & Ellis

Following a lengthy 13-month liquidation cycle, business inventories grew by 0.4 percent in both October and November. Higher inventory levels among manufacturers and wholesalers in November more than made up for a slight dip in retail inventories. The inventory/sales ratio fell to 1.28, its lowest level since July 2008. With this ratio back to pre-crisis levels, businesses are poised to increase inventories this year, which will translate into higher levels of factory production. This is one reason why the industrial market is likely to be one of the first commercial real estate sectors to begin a recovery.

Another type of inventory – the inventory of office space available for sublease – fell in the fourth quarter, closing out 2009 at just under 120 million square feet. This was the first decline following nine consecutive quarterly increases. Some of this inventory reverted back to the landlord as the leases expired and will show up as direct lease space, but much of the decline came as tenants subleased space at market-clearing prices. Falling sublease inventories typically precede the beginning of a broader market recovery.

Commercial RE Loans at Commercial Banks

Commercial real estate loans accounted for 24 percent of all loans and leases at commercial banks in the U.S. as of November. The Federal Reserve defines these to include “construction, land development, and other land loans, and loans secured by farmland, multifamily (5 or more) residential properties, and nonfarm nonresidential properties.” Large domestically chartered banks – the 25 largest in terms of domestic assets – held 17 percent of their loans and leases in commercial real estate while small domestically chartered banks held 41 percent in this category.

The preponderance of commercial real estate loans at small banks suggests more failures to come as distressed assets continue to accumulate. Moreover, small banks lend to small businesses, which are job incubators; commercial real estate loan problems at small banks could impinge upon their ability to lend, which could dampen the labor market recovery.

Source: Federal Reserve, Grubb & Ellis

This information is provided by Grubb & Ellis' Research & Knowledge Center

Sacramento Industrial Real Estate 2010 Forcast

As you may have read in the local papers, Grubb & Ellis just released their commercial real estate forecast for the upcoming year. The report includes a recap of industrial property activity for 2009. Click here to download the Sacramento forecast. We have also provided a Stockton Economic Overview with highlights about several factors that influence recovery.

For reports on other markets, nationwide, please click here.

Should you have any questions about these market reports or how we might help you negotiate a change in your lease in the Central Valley, please contact us at 916-418-6063 or theteam@cvcre.com

Home Sales

Sales trends for new and existing homes parted company in November. The National Association of Realtors reported that existing home sales rose 7.4 percent from October to a seasonally adjusted annual rate of 6.54 million units, the highest level since February 2007. Meanwhile, the Census Bureau reported that new home sales sank to a seasonally adjusted annual rate of 355,000 units, down 11.3 percent from October and the weakest level in seven months. Sales of foreclosed and other distressed properties are inflating existing home sales at the expense of new home sales, having accounted for 33 percent of existing sales last month.

The tax credit for first-time buyers, which was set to expire at the end of November, helped both new and existing home sales. But new home sales are counted when the sales contract is signed or a deposit is accepted while existing home sales are counted when the sale is closed, meaning that new home sales attributable to the tax credit likely showed up earlier in the data. The extension of the tax credit through April 2010 and its expansion to include some repeat buyers will provide a boost to home sales as the spring selling season gets underway. Besides ending the tax credit next year, the government will wind down its purchases of mortgage-backed securities, which has helped keep mortgage rates low. The withdrawal of these support programs will be a test to see if the housing market can continue to recover on its own or whether there could be another leg down in prices as foreclosures continue to mount.

Note to our readers: The Weekly Market Update will not be published next Monday because we will be releasing our annual forecast reports.

Source: Census Bureau, National Association of Realtors, Grubb & Ellis

This information is provided by Grubb & Ellis' Research & Knowledge Center

Wholesale Inventories

Wholesale inventories, one of the less "glamorous" economic indicators, increased in October for the first time in 14 months. Businesses have been paring inventories at a furious pace since fall 2008 when the credit markets seized up and the recession worsened. With businesses not replenishing their inventories, production activity slowed and workers had their hours cut or were laid off.

The cycle appears ready to swing the other way now as sales rose 1.2 percent in October, the sixth consecutive monthly gain. With sales rising and minimal inventories, companies will need to increase production, and there will be more goods flowing through corporate supply chains. This trend will support demand for industrial space, both manufacturing and warehouse-distribution space.

Source: U.S. Census Bureau, Grubb & Ellis

This information is provided by Grubb & Ellis' Research & Knowledge Center

Retail Sales

Retail sales are headed in the right direction with total and core sales (excluding vehicles and gasoline) posting their first year-over-year gains since the fall of 2008. It’s one more piece of evidence that the economy is firming up, but it comes with a caveat; the year-ago comparisons from which the gains are calculated were very low because that was when the credit crisis really got rolling, and consumers were deeply concerned about their financial well-being. Since then, the stock market has bounced part of the way back, home prices have found at least a temporary bottom and job losses are abating.

Moreover, there is likely some pent-up demand that has accumulated since consumers snapped their billfolds shut in late 2008. Consequently, retailers may do a bit better this holiday season, particularly since their inventories are lower and they may not need to discount as steeply. While good news for shopping center landlords, this does not mean that recovery is imminent. Expect leasing market conditions to soften through most of 2010 as retailers downsize further and the construction pipeline continues to empty out.

Source: Grubb & Ellis

This information is provided by Grubb & Ellis' Research & Knowledge Center