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Don't Be An Economic Hypochondriac

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A newsletter I received today is a bit more positive on the recovery and does make a good point that despite high unemployment our national office vacancy rate is better that expected.

Monday Morning Outlook

Brian S. Wesbury - Chief Economist First Trust
Robert Stein, CFA - Senior Economist First Trust

Over the past year, as we have defended our forecast of a V-shaped recovery and the economy has clearly turned upward, two things have happened.  First – slowly and quietly the consensus forecast for economic growth has been lifted – to roughly 3% real GDP growth from an anemic 2%.  We expect this to continue as the consensus forecast continues to move toward our 4%+ forecast.
Second – the list of worries over the economy has grown.  Remember credit card fears?  Well, delinquency rates are declining now.  What about Credit Default Swaps (CDS’s)?  Yeah, what about them?  As you read this, AIG is writing the value of these contracts up.  And who could forget Dubai?  Oh, you already did?
Well, no matter how many of these economy killers disappear into the mist of history, there are more to take their place.  A commercial real estate collapse, the “real” unemployment rate, housing foreclosures, ARM resets, deficits, government-created uncertainty, the lack of bank lending, universal healthcare, cap and trade, looming tax hikes, China, Greece, and don’t forget the unwinding of economic intervention by the Fed and Treasury and the petering out of stimulus.
It’s almost as if the better the economic data, the more things people worry about.
We don’t want to say that all these worries are not important, or misplaced.  There are problems and issues, but we do believe they are being overblown.  For example, the national office vacancy rate is 17.5% – high – but still lower than it was in the 1990-91 recession, and lower than one would expect when the unemployment rate is 9.7%.  And now with unemployment declining, vacancy rates should fall as well.
Many people fear a “real” unemployment rate of 16.5% (which includes the official unemployment rate plus marginally attached workers).  But this rate is always above the official unemployment rate and moves along with it.  In other words it offers no new information.  Everyone knows unemployment is high, but recoveries always begin when unemployment is high.
Government deficits are high, and it is true that government activity is creating uncertainty, but this has stirred political push-back rarely seen in the US.  It is very likely that the awakened and renewed political energy showing up these days will finally force Congress to address the issues of its long-term unfunded liabilities and its out-of-control spending.  In other words, the worry and fear may finally produce action.
Finally, bank lending, or the lack of it, is bothering many.  Conventional wisdom suggests that the economy cannot recover (at least strongly) without a pick-up in bank lending.  However, this theory leaves us wanting.  After declining in the past two years, total loans and leases held by commercial banks stood at $6.76 trillion at the end of 2009, which was above year-end 2007 levels or any time before that.  In other words, bank lending is currently at levels above those that existed during what most people call a “bubble” in bank lending.
Much of this is about attitude.  If you want to find things to worry about, you always can.  It’s like hypochondria.  But, in the end, with monetary policy accommodative and the panic over, the economy is heading upward.  And it’s funny how so many problems seem to dissolve when growth gets underway.

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Office Space , Office Vacancy Rate

$1.4 trillion in commercial real estate debt is expected to roll over during the next three years

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Washington Post February 19, 2010: Unlike residential mortgages, which often can be paid over 30 years, commercial real estate mortgages typically must be paid off or refinanced within five years. Commercial properties mortgaged in 2005, 2006 and 2007, at the height of the boom, are reaching their maturity date. "Do the math on this," Warren said. "This is a significant problem."

Nationwide, at least $1.4 trillion in commercial real estate debt is expected to roll over during the next three years. Warren said that half of commercial real estate mortgages will be underwater by the beginning of 2011. A fifth of residential mortgages are underwater now, she said.

Unlike residential mortgages, which often can be paid over 30 years, commercial real estate mortgages typically must be paid off or refinanced within five years. Commercial properties mortgaged in 2005, 2006 and 2007, at the height of the boom, are reaching their maturity date. "Do the math on this," Warren said. "This is a significant problem."


Buying Office Space , Commercial Real Estate , Office Building Sales , Office Space , Office Space Negotiations

A Good Time To Buy?

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It is a good time to buy office space if you have the cash. With the markets as depressed as they are, prices have dropped significantly on office building purchases. Reading the news, you will see many stories of lost office buildings or office buildings sold at a loss stories. Check out our Lease vs Buy section to find out if it would be a good decision for you.

One way to get into an office building purchase is to take advantage of the SBA’s 7(a) Loan Program: “This is SBA’s primary and most flexible loan program, with financing guaranteed for a variety of general business purposes. It is designed for start-up and existing small businesses, and is delivered through commercial lending institutions.

The 7(a) Loan Program is SBA’s primary program to help start-up and existing small businesses obtain financing when they might not be eligible for business loans through normal lending channels. The name comes from section 7(a) of the Small Business Act, which authorizes SBA to provide business loans to American small businesses. SBA itself does not make loans, but rather guarantees a portion of loans made and administered by commercial lending institutions.”

The SBA also offers the HTML clipboard CDC/ 504 Loan which provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization. Typically a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a Certified Development Company (CDC - funded by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost, and a contribution of at least 10 percent equity from the borrower. The maximum SBA debenture generally is $1.5 million (and up to $2 million in some cases).

Generally, you will need only 10% down and can borrow up to $2 million. Since this is through a traditional lender, you will need to meet their standard qualifications and probably only qualify if you are in a large market. The banks do not want to have to take advantage of the guarantee.  If they do too often, they will find themselves off the list of banks allowed to make the 7a loans.

See our Financing Section for other alterntives.


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Three to Four Year Office Market Recovery?

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WASHINGTON (AP) -- The outlook for jobs became a bit less bleak with January's unexpected decline in the unemployment rate, which fell to 9.7 percent from 10 percent as more people said they had jobs.

Still, Friday's unemployment report showed just how deep the job crisis remains. The government now estimates 8.4 million jobs vanished in the Great Recession, and economists think the nation would be lucky to get back 1.5 million of them this year. And they say it will take at least three to four years for the job market to return to anything like normal. <End>

Not particurally good news for the office market. Employment is directly related to occupancy. If the econimists are correct, it means office space occupancy will take three to four years to return to normal vacancy rates in the 8% - 12% range.

Commercial Real Estate , Office Space , Office Space Negotiations , Office Vacancy Rate

Mortgage Banker vs Fed Reports - Conflicting Message?

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?So we have 2 apparently conflicting reports on the same day.  The Fed survey tells us loans are not loosening for commercial properties and then the Mortgage Bankers tell us that they increased in the 4th Quarter of 2009 over 2008. What's going on?

It seems pretty apparent what is happening, but it could be a confusing to some trying to figure it out. Basically, originations immediately after the crash in 2008 would have come to a standstill, 4th Q 2008 originations would be nil for commercial properties. Everyone was on hold.  Even a very low number of originations in 4th Q 2009 would be an increase. I'd be interested in finding out the numbers for 4Q 2007 and comparing to that. It seems to me to be a PR play by the Mortgage Bankers to have the public believe that they are doing commercial lending.

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