Flex space in Sacramento

What is flex space?  Typically, it's a unit that is about half office and half warehouse.  Sometimes, there is a retail element to the suite instead of office.  Companies that need flex space tend to be on the smaller side (under 5,000 square feet).  Most businesses in flex space fall under the light industrial uses category such as flooring companies, security companies, engineers, labs, small food processors, electrical contractors and even churches to name a few.

If you are looking for such a space, we have various suite available at Woodlake Business Park in Sacramento located at 211, 221, & 231 Lathrop Way.  Please feel free to visit our website to see if there is a flex space available for lease to fit your needs.

As always, you can contact our team with any questions:

Bryce Macdonald
916.288.4806
bryce.macdonald@cushwake.come

10-year Treasury Yield

The historic events of the past week are best viewed as an aftershock -- the most serious one yet -- of the 2008-09 financial crisis. There is no shortage of economic variables that describe what is happening now, but arguably none are more encompassing than the yield on the 10-Year Treasury note. The yield fell to 2.47 percent on Thursday, the day that the Dow Jones Industrial Average cratered by 512 points. It rose slightly on Friday before plunging even further as of mid-day Monday. The irony is that in a market motivated by risk-aversion, investors continue to crowd into U.S. government debt, pushing the yield lower, even after Standard & Poor’s reduced its rating from AAA to AA+ with a negative outlook, in effect saying the debt now carries greater risk of default. The market's aversion to risk emanates from deteriorating economic conditions in the U.S. and Europe and from poor decision-making by policy makers – the debt ceiling debacle here and the inability of eurozone officials to effectively address solvency issues in some of its member countries, most recently Italy and Spain. This period of uncertainty may extend for several weeks or months as policymakers scramble to put effective solutions in place.

Regarding commercial real estate, two broad observations are in order. First, investors across all asset classes are fleeing risk, and if the financial uncertainty persists, the same sentiment may become evident in commercial real estate. This means that debt and equity capital may focus with even more intensity on core assets in primary markets, which offer safety and liquidity relative to riskier properties and markets. Secondly, an economic downturn would erase some of the recent progress in the leasing markets.
Source: Federal Reserve, Grubb & Ellis

Unique industrial sublease at former Air Force base

Located at McClellan Park in Sacramento, this +/-142, 978 square foot fully insulated former light manufacturing space is currently available for sublease.

The suite boasts +/-20,000 square feet of office space, 7 dock high doors, heavy power, good parking, as well as extensive air lines & compressor.  T-5 lighting, dock pit levelers, and a large lunch room are just a few of the improvements.

McClellan Park itself is a unique multi-modal opportunity featuring onsite airport, hangar rental, and rail service.  Hotel & conference facilities, restaurants, and extended stay accommodations are all located within McClellan Park.

Formerly known as McClellan Air Force Base, a special LAMBRA tax incentive is available for tenants.  Please visit this site for more information on the tax incentives.: http://www.hcd.ca.gov/fa/cdbg/ez/lambra/

For more information on this unique industrial sublease opportunity, please contact Matt Cologna, SIOR at 916-418-6016 or via email at matt.cologna@grubb-ellis.com  or visit our team website to download a brochure.

U.S. Intermodal Container Traffic

During the first week of a new quarter, when the previous quarter’s statistics are old news and new numbers are not yet available, the newly released statistics by the Intermodal Association of North America might provide some insight into the industrial real estate market. In April, traffic of domestic containers rose 7.9 percent year-over-year, while international container traffic increased by 7.4 percent. April was the first month of the year showing a decline in the rate of growth for domestic containers, and also an acceleration of growth for international containers.

A closer look at the underlying numbers reveals two interesting findings. First, international trade is a lot more volatile than domestic production. During the entire recession, there were only four months of negative year-over-year growth in domestic container activity, with the largest decline being 3.7 percent. International containers show 13 consecutive months of contractions, declining by as much as 28.3 percent in February of 2009. The Inland Empire industrial property market, which is primarily driven by international trade, showed a similar volatility and steep declines in 2009, while today it is the fastest growing market in the country. Since different capital sources have varied tolerance of risk, market volatility needs to be incorporated into every investment strategy.

Second, the overall growth numbers are strong. In the first quarter, the movement of domestic containers outpaced the overall economy by 400 percent, while international containers beat GDP by 500 percent. This spread in growth confirms that supply chains are ever-evolving and their reconfigurations will continue to create activity in the industrial real estate sector.

Sources: IANA, Grubb & Ellis Research

Drivers of Industrial Demand

In April and May, every statistic that is relevant to demand for industrial space has decelerated. Industrial production grew just 0.1 percent after growing 0.4 percent in the first quarter and averaging 1.6 percent quarterly in 2010. The ISM index fell from 61.2 in March to 53.5 in May. This was a much steeper decline than was anticipated, with production and new orders leading the way, falling 15 and 17 points, respectively. Some of these declines in the manufacturing sector can be attributed to the supply disruptions in Japan, but they suggest weak second-quarter growth in the broader economy. Consumers have also slowed during the quarter, with total retail sales remaining flat, creating additional impetus for reduced production and inventories. The ISM inventory component, in fact, turned negative in May.

Total job creation has also slowed, with the government having a negative impact since October 2010 and the private sector adding just 83,000 jobs in May, representing the slowest job creation since June 2010. Even metrics related to the movement of goods have slowed during the quarter. As reported by the ATA Truck Tonnage Index, total goods moved by trucks declined in the second quarter. Activity at U.S. sea ports remains robust, but year-over-year growth in imports slowed to 5.9 percent in May, compared to 9 percent in April. Overall, the U.S. economy grew just 1.9 percent in the first quarter of 2011, and growth in the second quarter is unlikely to be much higher. Economy.com expects 2 percent growth, but some forecasters see it growing closer to 1.5 percent.

Over the next two weeks, Grubb & Ellis researchers will compile our second quarter Market Trends Reports. Just a few months ago, we predicted that demand in the second quarter would match the strong results from the first quarter, when the market experienced approximately 30 million square feet of positive net absorption. Given the weaker economic performance, however, net absorption coming in at half of the last quarter’s number is more likely. Let’s hope for a surprise on the upside.

Source: Economy.com, Grubb & Ellis Research

Real Annual Gross Domestic Product

Historic & Forecast

The Federal Reserve released its quarterly summary of economic projections last week, reducing its forecast of GDP and raising its forecast of the unemployment rate in 2011 and 2012. In doing so, the Fed acknowledged what many private economists have been saying for several months – that the pace of the recovery has slowed this year. The Fed's previous GDP forecast range of 3.1 to 3.3 percent for 2011 was reduced to a range of 2.7 to 2.9 percent, and the previous unemployment range of 8.4 to 8.7 percent for the fourth quarter of 2011 was raised to a range of 8.6 to 8.9 percent. Forecasts for 2012 were downgraded as well. While acknowledging the recent spike in inflation, the Fed believes that inflation will remain at or below its target range of 1.5 to 2.0 percent through at least 2013.

Fed Chairman Bernanke said in his press conference last week that temporary factors such as high oil prices and supply chain disruptions related to the disasters in Japan are depressing output, but other, longer-lasting factors could be at play, too. Such factors could include the failure of the housing market to stabilize, reduced bank lending and persistently high levels of consumer and government debt. For commercial real estate, this economic scenario would translate into continued sluggish leasing activity with the exception of apartments and hotels. Although investors have begun targeting riskier assets this year, i.e. non-core properties and properties in secondary markets, the slow leasing market recovery could delay broader interest in value-add and opportunistic properties, where success requires strong leasing demand and rising rental rates for higher quality properties.
Sources: BEA, Federal Reserve, Grubb & Ellis

State Employment Change

Year-to-date Through May (thousands)

Four of the five states posting the strongest job creation numbers year-to-date were also among the hardest-hit states during the recession. California and Florida, devastated by the housing collapse, are adding jobs at a respectable clip while manufacturers in Ohio and Illinois, particularly those related to exports and vehicle production, have rebounded briskly. However, these states remain well below their pre-recession employment peaks, particularly Florida, which is still down by 10.3 percent. Texas, which did not suffer from a housing bubble, is growing thanks to the energy industry and population in-migration.

Texas trails its previous cyclical high by just 0.7 percent and could set a new peak by year-end. On a percentage basis, the top five growth states are North Dakota, Oklahoma and Nebraska – strong in energy and commodities – plus Ohio and Utah. Among the five states lagging in job growth year-to-date, Georgia – usually among the early states to recover following a recession – stands out as a victim of the housing bubble and the related distress among banks.
Source: Bureau of Labor Statistics, Grubb & Ellis

Outstanding Commercial & Industrial Loans

All Commercial Banks, Seasonally Adjusted

The value of commercial and industrial loans, i.e. business loans, on the balance sheets of U.S. commercial banks has been on the rebound since last fall, a positive sign for the economy. A separate survey of banks conducted quarterly by the Federal Reserve reveals that banks have been loosening C&I loan standards since the second half of last year. Moreover, the survey reveals that demand for C&I loans from creditworthy borrowers has firmed up this year. The growing availability of – and demand for – debt capital is a positive sign in a sea of lackluster economic indicators, a tailwind that will help carry the economy through the current soft patch. For commercial real estate, the rebound in C&I lending is a positive sign for leasing activity.

Source: Federal Reserve, Grubb & Ellis

Good News Friday

Planes, Trains & Automobiles (and Ships and Trucks) - by Robert Bach, Senior Vice President, Chief Economist - Grubb & Ellis

Exports are a bright spot for the economy, increasing by 1.2 percent in April according to newly released data from the Department of Commerce. The weak dollar played an important role by making U.S. goods and services relatively cheaper overseas. Because imports fell in April by 0.4 percent (led lower by oil and autos), the trade deficit narrowed, meaning that net exports could be on track to make a better-than-expected contribution to second quarter GDP. The drop in imports could be temporary, however, as vehicle imports bounce back from the recent disasters in Japan.

Rail traffic reflects growing trade volumes and the expanding movement of goods through corporate supply chains. Year-to-date through May, rail intermodal loadings are up 8.5 percent from the same period last year according to the Association of American Railroads. One reason is that year-to-date volume at six major U.S. ports tracked by the AAR is up 8.2 percent from the same period last year, and rail service is needed to carry the containers to and from the ports.

Several indicators show that manufacturing activity has decelerated recently along with other sectors of the economy, but it remains a relative bright spot. It is one reason why my colleague Rene Circ, Grubb & Ellis’ National Director of Industrial Research, thinks speculative construction of industrial space could bounce back more quickly than commonly expected. Click here to read Rene’s article.

ISM Indexes

The Institute for Supply Management maintains two indexes, one for the manufacturing sector and a non-manufacturing index that measures service industries. Based on surveys of purchasing managers, these indexes are early indicators of inflection points in the economy. Both indexes confirm the recent economic slowdown with manufacturing taking a big plunge last month and non-manufacturing dropping sharply in April before recovering slightly in May. Both indexes remain above 50, the threshold that indicates expansion.

The new orders component of the indexes, a leading indicator of future production and shipments, suggests further deceleration for manufacturing while non-manufacturing industries could see a modest rebound. The ISM indexes are in line with other recent indicators pointing to slower growth -- employment, housing, consumer confidence and GDP. The economy's abrupt loss of altitude is due to several factors: high gas prices, supply chain disruptions from the disasters in Japan, slower growth in emerging markets as their central banks raise interest rates to battle inflation, and the unstable outlook in the eurozone. For commercial real estate, slower economic growth translates into slower leasing activity (a minus), but it is being accompanied by falling interest rates (a plus). A near-term recession is unlikely, but growth could remain sluggish through the summer and early fall.
Source: Institute for Supply Management, Grubb & Ellis