Catch 22 -- Logical Paradox of this Recession and The Recovery

An Economic Catch-22 —A Logical Paradox for Job Growth?

A recent report from the UCLA Anderson Forecast issued June 15th 2010, predicts that the California economy is expected to grow a bit slower than the nation's economy for 2010, and only slightly faster thereafter. This slow growth rate will result in only modest inroads into the state's high unemployment rate.

The report titled “A Homeless Recovery,” concludes that this time around, the economy can’t count on free-spending consumers to boost it along. The report cites today’s “frugal consumers” and describes “If the next year is going to bring exceptional growth, consumers will need to express their optimism in the way that really counts; buying homes and cars. And that is not going to happen if businesses continue to express their pessimism in the way that really counts by not hiring workers.”

In another element of the forecast, the economists predict the recovery will be “rocky” in the commercial real estate sector. “There is just too much debt that has to be worked through”.

The report cites an “Economic Catch-22.” (A Catch-22, coined by the author Joseph Heller in his novel of that same name is a logical paradox wherein a situation exists in which an individual needs something that can only be acquired by not being in that very situation; therefore, the acquisition of this thing becomes logically impossible.) The challenge is that significant reductions in the unemployment rate require real gross domestic product growth in the range of 5% to 6%, compared with normal GDP growth of 3%. As a consequence, consumers concerned about their employment status are reluctant to spend and businesses concerned about growth are reluctant to hire.
UCLA Anderson’s forecast for GDP growth this year is 3.4%, followed by 2.4% in 2011 and 2.8% in 2012, well below the 5% growth of previous recoveries and even a bit below the 3% long-term normal growth. In the California forecast they indicate that the state “will grow slower than the US and a slow recovery in jobs will leave unemployment at 12.1% for the year.” “The latter part of our forecast (through 2012) calls for health care, professional and business services, exports, construction and technology-related manufacturing sectors to generate a bit more robust growth in California.”

The Anderson report is another estimate of a “jobless recovery”. Their conclusion is that the state will grow more rapidly in the following two years but that job creation will not be fast enough to push the unemployment rate below double digits until 2012. “Unlike other deep recessions, the rapidity of the recovery, at least on the unemployment front, will be muted”…

To read more here is a link to additional coverage from UCLA Anderson:
http://newsroom.ucla.edu/portal/ucla/ucla-anderson-forecast-u-s-recovery-160346.aspx

Commercial and Investment Real Estate is both a global and local investment that is influenced by many factors including macro economic conditions. If we can assist you with commercial real estate in northern California please contact us at JimandNahz@ctbt.com or call us at (916) 375-1500

Western Real Estate Business Article on Sacramento Office Market

This month, June 2010, the magazine Western Real Estate Business has a profile on the Sacramento Market. With our colleagues at Cassidy Turley we contributed to the commercial real estate market review. Here are our particular observations on the office market in Sacramento..

Office

The Sacramento Valley office vacancy rose to 16.3 percent in first quarter 2010, as total availability increased 300,000 square feet for a total of 13.9 million square feet. Sublease space remained constrained, representing less than 3 percent of the total availability. The overall average asking rate for office space slid another $0.03 per square foot quarter over quarter to $1.85 per square foot full service in first quarter 2010.

Gross absorption was a mediocre 1 million square feet in first quarter 2010, about 25 percent less than its quarterly average in the past year and 40 percent below since 2005. Large tenants remain very scarce in the market, with most of the activity being dominated by smaller tenants less than 10,000 square feet. Net absorption, the change in occupied space, was a negative 368,000 square feet in first quarter after having reported positive 117,800 and 213,000 square feet in fourth and third quarters of 2009, respectively. Notably, during the past year, net absorption (which excludes new vacant construction) has actually held stable with just negative 50,000 square feet. The heavy dose of new unoccupied construction has really been a primary cause for the large increase in vacancy and availability in the past year.

The larger leases in first quarter 2010 included California State Board of Equalization for 76,502 square feet in Sacramento; ITT Technical Institute for 27,020 square feet in Rancho Cordova; Principal Financial Group for 24,645 square feet in El Dorado Hills; and Brown & Caldwell for 22,126 square feet in Rancho Cordova. There were also a handful of notable sales, led by CSAC Excess Insurance Authority’s acquisition of a 48,591-square-foot building in Folsom.
Office construction continued to trickle at the start of 2010 as projects funded more than 1 to 2 yearsr ago are now finally being completed. One building was delivered in first quarter: the 141,210-square-foot Sutter Health Facility in east Sacramento. This pace is already drastically cooler than last year when 1.9 million square feet were delivered and caused a massive swelling to the area’s vacancy rate. The development pipeline, however, is quickly diminishing as developers wait on the sidelines until market conditions become favorable. This slowdown is a double-edge sword, as it will help alleviate rising vacancy, but it will also take away construction jobs, a historical key source of job growth for the market.

The climate continues to remain favorable for tenants as there are still a lot of rental rate discounts being offered, plus concessions such as free rent and higher tenant-improvement allowance dollars from landlords. Lease terms also remain shorter, with the typical leases ranging between 1 and 3 years. The office sector will continue to battle the effects of the economic recession. The services and tech sectors lost a reported 10,000 jobs, and the job outlook ahead remains pretty grim. The forecast is that there will continue to be growing vacancy, slightly lower rents and very little new construction. The bright spots in the local office market have been and will likely continue to be owner-user sales financed with SBA long-term, low-interest loans and growth in healthcare and education.

Notably, the heavy majority of the 10 largest office leases transacted in 2009 were from the state’s government. Government is at risk as revenues from property and sales taxes continue to shrink, as the deficits become increasingly structural. Employees are being furloughed. Services are being cut back, and capital expenditures are being frozen. A great deal of the federal stimulus funds found their way to state and local government last year, but who knows what the political future holds? What happens to state and local government will have profound impacts. There is reason to be more optimistic, but being able to avoid a “double dip” is not certain.

— Jim Gray is a partner and Nahz Anvary an associate in Cassidy Turley BT Commercial’s Sacramento office.

Here is a link to the entire article:

http://westernrebusiness.com/articles/JUN10/highlight1.html

Sacramento Employment Continues to Deteriorate

Sacramento Employment Numbers Show Further Deterioration—Sit tight, no recovery in sight
A recent report by Sacramento Regional Research Institute points out that there are 12,600 fewer jobs in the six county Sacramento Area at the end of July 2008 than there were a year earlier. This means that there are 1.3% fewer jobs than there were last year. Actually, the report indicates that we have lost 14,000 private sector jobs and actually added 1,400 public sector jobs. This is the slowest employment growth in almost two decades. The declines were steeper as a percentage in Sacramento than in the Bay Area or California as a whole.

The largest losses were in the following sectors: Construction (-6,100), Leisure and Hospitality (-3,000), Financial Activities (-2,800), Trade Transportation and Utilities (-2,700), Manufacturing (-2,100), Information (-400). Those sectors of the regional economy that added jobs included; Education and Health Services (+2,000), Government (+1,400), Professional and Business Services (+800), and Other Services (+300.)

Employment is a significant driver of commercial real estate. This underlying economic condition leads to reduced demand for office, warehouse, and retail spaces. In addition, these real job losses affect the overall economy, reduce earnings and spending, and contribute to a regional slowdown.

Things are pretty tough already in the regional economy but we are very concerned about the next stage of this slowdown. A recent Sacramento Bee article reports that the California legislature is still deadlocked on agreeing on a new budget—with a deficit of $16+ Billion dollars – it appears that the State is going to continue to reduce expenditures for the poor and needy-- and is likely to siphon off almost $3 billion dollars from County and City governments. That article of August 30, 2008 is entitled “It may all come down to a whole lot of borrowing – again” and you can find it at http://www.sacbee.com/111/story/1197429.html

Government employment at the state and local levels will have to slow or probably reverse. This will be felt in the California Capitol Region with greater impact than elsewhere in the State. What sector will step up and lead the recovery? A recovery will come…but when? Our guess is things will get worse before they get better.

Our advice for landlords of commercial real estate properties is that this is a time for making sure your current tenants are happy with the level of service and property management you are providing to them and to evaluate whether you can get an extension and renewal for your current tenants, and it is a time to get aggressive as it relates to “asking rents” and prices and concessions to attract new tenants.. We think being conservative and focusing on operating efficiencies and satisfied tenants is the thing to do now. It is time to sit tight and ride this through until the tide turns.

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/

Sacramento Job Growth Turns Negative...Worst in 15 years

Sacramento’s Negative Job Growth

According to the analytical employment work done by Sacramento Regional Research Institute, SRRI, for the first time in more than 15 years Sacramento’s job growth for a consecutive 12 month period has turned negative! See the steep decline in the green line below. That is the Sacramento Valley Line. Our region’s employment has declined more steeply than the Bay Area’s, more than the US Average, and worse than the California Average. There are 6,500 fewer jobs than there were 12 months ago.

This chart shows it in declining and vivid detail:

Six sectors in the Sacramento Region posted year-over-year losses resulting in a combined decline of 14,200 jobs. The Construction sector showed the largest decrease followed by Trade, Transportation, & Utilities (concentrated in the Retail Trade component).

Six Sectors showed positive job growth , they included; Government; Educational & Health Services; Professional & Business Services; and Other Services all added jobs between May 2007 and 2008, but only created a 7,700 job gain, which helped cushion, but did not completely make up for, the other relatively heavy losses.

These job losses are a clear indication of the economic woes and strain that are confronting the Capitol Region. We are all aware of the sharp declines in construction- primarily residential and new home construction- but financial services, manufacturing, utilities, and retail trade are additional sectors that are now shrinking. If you use a multiplier of 4 jobs per thousand square feet of office demand --- the 14,200 job decline in those six sectors means that more than 3,000,000 feet of office space that would have been the home for these workers now will be surplus and vacant. If you look at the offsets for those sectors that did add jobs this past year we still have a demand for nearly 1.5 million fewer feet than a year ago.

As they say in every economic cycle there are winners and losers. In the Sacramento region we now have 2 losers for every winner. Also it is worth noting that the largest growth has been in the government sector—we lost 3.1 private sector jobs for every government job that was added. Clearly, this situation is neither innovative nor sustainable. Also one must wonder as the reality of a $16+ Billion state budget deficit sets in will government employment continue to mitigate the private sector job losses. The other shoe may fall!

For a complete review of the report see; SRRI Economy Watch, EMPLOYMENT GROWTH IN THE SACRAMENTO REGION, THE BAY AREA, CALIFORNIA, AND THE UNITED STATES, June 2008.
If you have questions about this Post or if you would like to discuss a real estate question or need please contact Jim Gray or Nahz Anvary , of NAIBT Commercial Real Estate. We can be reached at (916) 375-1500.