Spring’s Green Shoots

In the 1979 movie, Being There, Peter Sellers plays a simple-minded gardener named Chance who has spent all his life in the Washington D.C. house of an old man. When the man dies, Chance is put out on the street with no knowledge of the world except what he has learned from television. After a run in with a limousine, he ends up a guest of a woman (Eve) and her husband Ben, an influential but sickly businessman. Now called Chauncey Gardner, Chance becomes friend and confidante to Ben, and an unlikely political insider. The following is an exchange between the President, Chance, and Ben.President “Bobby”: Mr. Gardner, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives? [Long pause]
Chance the Gardener: As long as the roots are not severed, all is well. And all will be well in the garden.
President “Bobby”: In the garden.
Chance the Gardener: Yes. In the garden, growth has its seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
President “Bobby”: Spring and summer.
President “Bobby”: Then fall and winter.
Benjamin Rand: I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we’re upset by the seasons of our economy.
Chance the Gardener: Yes! There will be growth in the spring!
President “Bobby”: Hm. Well, Mr. Gardner, I must admit that is one of the most refreshing and optimistic statements I’ve heard in a very, very long time.
It seems the commercial real estate sector is showing some signs of life as well. Consider the following and let’s hope for continued ‘growth in the spring!’

Office. Unemployment seems to be stabilizing – some would say improving. And since workers need office space, it seems this property segment should continue to improve. Consider the fact (reported last week by Reis) that office rents were stable or rose in the 23 of the 79 markets it tracks. Three months ago, rents in 70 of the 79 markets fell. Perhaps we have turned the corner.

Retail. Consumer spending, while showing some improvement as of late, continues to be a concern – especially for the retail property segment. Reis reports that retail landlords continued to lower lease rates to attract tenants during the first quarter (of 2010), revealing that optimism about a recovery in retail sales has yet to translate into gains for shopping-center owners. Lease rates at shopping centers declined to $16.62 in the first quarter, down 1% from the prior quarter and down 3.4% from a year earlier.

Apartments. Nationwide, apartment rents rose during the first quarter – the first time in five consecutive quarters (and rents rose in 60 of the 79 markets covered by Reis). Nationwide, the apartment vacancy rate stayed flat at 8% — still the highest level since Reis began its tally in 1980. Tenants are staying longer (19 months on average) despite having the ability to move up to home ownership. Perhaps this decision stems from a continued uneasiness about the recovery.

Financing. While some investors grossly overpaid at the height of the boom and have defaulted and banks have taken write-downs, most commercial real estate borrowers have had the cash flow to keep loan payments current or refinance to buy more time. The rock-bottom interest rates have helped matters. News from the recent MBA annual conference was positive and indicates life insurance companies plan to increase their commitments to commercial real estate in 2010. More interesting is the re-emergence of the CMBS market as of late. Still capital is hard to come by, lenders are underwriting at much more conservative levels (especially as it pertains to equity contribution) and the cost of this capital has increased to levels similar to the mid-1990s.

Single-Family Housing. As reported in the WSJ, the latest S&P/Case-Shiller survey results, released last week, suggest housing prices bottomed out around April 2009, when its 20-city composite index was down 32.6% from its peak reached in June/July 2006. Since then it has gained 3% through January 2010
Investment. Many commercial real estate assets have already rallied strongly since bottoming in March of last year. Vanguard REIT Index Fund is trading at a high for the year, and double what it was at its low for the year. Those who were willing to embrace considerable risk when the economy seemed to be collapsing have been handsomely rewarded. I believe there are more buying opportunities on the horizon – particularly as commercial and community banks continue to clean up their balance sheets. However, as the market continues to improve, the bargains will be harder to come by.

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