Economic Mumbo Jumbo

August 11, 2011

DataVest | Sperry Van Ness addresses the economic clamoring that took over Wall Street last week with the downgrading of the US Credit Rating. The S & P Downgrade has sent shock waves through the economic pipeline. Both the Dow Jones Index and S&P 500 Index have shown significant systemic fractures this week breaking underneath the 200 day moving average as we anticipated by the increased trader volume evidenced last Friday. At this juncture institutional investors typically start to dump holdings to minimize losses and protect their core capital base. The University of Michigan's July Consumer Confidence Level had its largest drop since July of 2009 and ended up at 63.7. The average level of this market monitor has been 85.9 since its inception in 1978.

So what does this have to do with Commercial Real Estate? In the stock market "fear travels as twice the velocity of greed". So too is the case in Real Estate. In both arenas, market sentiments override rationale and corrections tend towards extremes and volatility. It is in these circumstances of "conflicted clarity" that opportunity exists for those with a nimble vision and a reasonable capital capability.

Certain economic signals are positive in today's marketplace. Credit has become more readily available. Private Sector job growth (150,000 in July) is increasing as are corporate profits. Increased capital is in fact making its pathway into the commercial real estate pipeline. As evidenced in retail sales in Dallas in our last week's blog, there has been a certain cap rate compression in that specific market sector. Also, there is a disproportionate spread of yields in commercial real estate vis a vis 10 year treasury yields. The highly unattractive rates on capital in major banking centers make the desirability of real estate and hard assets ever-more attractive. The securing of additional liquidity through ever-greening ones real estate portfolio is well-advised in these economically volatile cycles. Liquidity is always "queen" with cash still remaining "the king".

Additionally, certain types of investment targets can alleviate the pain of diminutive economic return of those minimal time-money deposit yields offered at today's bank depositories. "Single tenant" and single-tenant NNN retail, office, and industrial properties have gained ever-increasing popularity these past months. In 2010, according to Real Capital Analytics, over $8.4 billion of single tenant-office properties changed hands. That represented 20% of all office investment sales and a 135% increase over the prior year. Similar asset stalking of single-tenant industrial properties likewise resulted in increased sales volume where owners were achieving 93% of their asking price. Pricing opportunity likewise has presented itself in both secondary and tertiary commercial marketplaces as competition in the major primary markets is very stringent dramatically impacting yield premiums and unrealistic expectations thereof.

As this market continues to experience increased market volatility, prudent investors are well-advised to secure strong tenant-anchored properties. These opportunities might well include major US corporations as well as tenancy from the United States Government. The credit rating downgrade last Friday was not a result of the verdict of the US government's inability to meets its current debt obligations...although at some point our system will become strangled by this ever-growing debt equation. Nor was it the result of the infinite castigation of the Obama Administration by our beloved Tea Party. Conversely, it was "an appropriate indictment" on the ineffective governmental policy makers and legislators who care more about political expediency and bantering brinksmanship than the espousal of sound economic vitality and political leadership. Last week's ill-advised walk down those treacherous political pathways to have a gander over the edge of a rather precipitous and troubling cliff attested the reality of the existence of a most-dreaded valley of an impending and foreboding potential economic disaster. So to the courageous captains and champions of tomorrrow's economic commerce I bid thee "Man your stations, matey...Opportunity Ahead!"

Bruce Marshall

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Retail Sales Numbers: Slice and Dice Exercises

August 6, 2011

DataVest | Sperry Van Ness completed a reconciliation of sales and statistical information compiled by Real Capital Analytics over the past 24 months on Dallas Retail Strip Centers. Sales Volume increased about 171% from 2009. Sales moved from $263.7 Million in 2009 to $714.5 over the past 12 months and an annualization of the past six months would indicate a 12 month pro-forma sales volume of $1,096 Million reflecting 416% increase.

Sales Price Per Square Foot Numbers have also increased from asking prices in 2009 at $120.40 per square foot to year-to-date sales under contract and/or closed of $158.50 which represents a 32% increase.

Deals transacted over the past 12 months in this category represent 41 transactions verses 11 transactions in 2009 representing a 372% increase. Over the past six months 30 transactions have been reported closed or contracted or an increase of 272%.

In terms of deal size the total square footage of this product type represented 920,077 square feet in 2009 verses 4,842,481 square feet over the past 12 months which reflects a 635% increase.

Cap rates have moderately compressed and in 2009 newly offered products reflected a Mean Cap Rate of 8.58%. The past 12 months this mean cap rate decreased to 8.34% which is a 24 basis point compression. Year to date cap rates reflect 8.31% on newly offered properties and 7.49% on properties closed or in contract in Dallas.

When comparing Dallas Cap Rates to National Cap Rates, investors still have opportunity ahead of them as Dallas has a year-to-date Mean Cap Rate of 8.31% versus 7.77% on properties currently on the market resulting in a 54 basis point differential. On actual closed transactions, this gap narrows to 19 basis points as the National Average reflects a 7.68% on this product sector and 7.49% in the Dallas Marketplace.

Bruce Marshall

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