What A Difference A Year Makes

What a difference a year makes. Cautious optimism and value added opportunities have given way to despair, and the recession is growing deeper, unemployment is rising at over 600,000 newly unemployed each month nationally and the Sacramento region already has more than double digit unemployment. Most of those investors who acquired an investment property in 2007 and 2008 are shaking their heads and re-visiting their projections and their pro-formas and wondering where the tenants are and why rents are declining? Just reflect on the past year – the Dow Jones Industrial average has dropped more than 52% and economists report that households have lost approximately 10 trillion dollars. Consumer spending is falling, auto sales have nearly been halved, and Sacramento leads the nation in the number of auto dealerships that are closing.

The real estate cycle is back! And with a vengeance! This time the downturn is steeper than probably any other since our parent’s and grandparent’s great recession—albeit depression of 1929-1934. During this past year we have seen the decline and failure or nationalizing and forced merger of financial giants including Freddie, Fannie, AIG, Wachovia, Lehman Brothers, Countrywide, Merrill Lynch and etc. Wall Street has been battered and Main Street is bruised. Many need “first aid” but a growing number need hospice services.

A report in the March 9th edition of the Sacramento Business Journal has a headline that drives the point home clearly to us and to our industry; “Sacramento Commercial Real Estate Falls 88% in 4th Quarter”. A lack of financing alternatives and a weak economy led commercial real estate sales to plummet in the Sacramento region during the fourth quarter of 2008, most notably in the office building market, according to sales data from Loopnet and Real Capital Analytics.

The report shows a total of $275 million in office buildings with a price above $2.5 million were sold during the last three months of 2008. That’s down 88 percent from the same period in 2007, when $2.4 billion in property was sold. Sales of industrial buildings fell from $304 million to $127 million; retail building sales fell from $564 million to $223 million. Apartment building sales, however, increased from $580 million in the last quarter of 2007 to $594 million in the same period in 2008.

In the local banking environment, the Business Journal reported on March 6th that only four of eleven local banks had profitable earnings. Local banks endured a difficult fourth quarter as they pumped money into reserves, which reduced earnings and only one of Sacramento local banks had a fourth quarter that was stronger this year than last.

Some of the declines in earnings are attributable to outright losses, but by far most of the declines are from placing large sums of money into reserves to protect from possible loan losses. As the recession deepens the possibility of continuing and even larger losses are great and deepening according to most analysts and most local bankers.

These are truly tough times. There are great challenges and it will require “hunkering down” and recognizing that great opportunities will emerge –but probably not right away. Sacramento was one of the first regions to begin declining and sinking into the recession and hopefully, and likely, we will be one of the first to emerge from it! The future will be bright for those who work and invest smartly and truly bring value, good underwriting and recognize that the real estate cycle will rebound and turn upward. This time next year I am sure we will point out what a difference a year makes once again. If you would like to discuss this blog post with us or if we can help you with a commercial or investment real estate transactions, please call or email us at Jim Gray (916) 617-4255 jgray@naibt.com or Nahz Anvary (916) 617-4257 nanvary@naibt.com. “Build on the power of our network” visit our website at http://www.naibtcommercial.com/