Second Quarter 2009 Report Investment Trends Vol. 5, No. 2 Quarterly Spotlight on Nashville Sponsored by: InThisVolume Now Available! National Overview In Search of Bottom Economic Background and Investment Environment How Is Commercial Real Estate Affected? A Focus on Real Estate Cap Rate & Yield Rate Expectations National Market Analysis & Property Sector Highlights “Nashville Tunes in New Economic Growth...Beyond the Music” Contributors Scope & Methodology Regional and Metro-Level Analyses Coming Soon! East Region Baltimore, Boston, Charlotte, Hartford, Norfolk, Northern New Jersey, New York City, Pittsburgh, Philadelphia, Raleigh, Richmond, Washington, D.C. South Region Atlanta, Austin, Dallas/Ft. Worth, Houston, Memphis, Miami, Nashville, New Orleans/Baton Rouge, Oklahoma City, Orlando, San Antonio, Tampa Midwest Region Chicago, Cincinnati, Cleveland, Columbus, Detroit, Indianapolis, Kansas City, Milwaukee, Minneapolis, Omaha, St. Louis, Toledo West Region Denver, Honolulu, Las Vegas, Los Angeles, Phoenix, Portland, Sacramento, Salt Lake City, San Diego, San Francisco, Seattle, Tucson Investment Trends Copyright© 2009 by Real Estate Research Corporation (RERC) and the CCIM Institute. 1 Quarterly Foreword May 2009 Dear Readers, Although the sense of optimism that we usually have during the spring season is being overshadowed by the reces- sion, there are news flashes here and there that indicate the economic freefall may be slowing. However, first quarter 2009 GDP contraction was nearly as low as that for fourth quarter 2008, and while not as many people in April lost jobs as did people in March, the unemployment rate increased from 8.5 percent in March to 8.9 percent in April. We were reminded that while it appears economic stabilization is underway, there will be many more ups and downs ahead of us before we see anything resembling economic recovery. As for commercial real estate, a lagging indicator to the economy, we have yet to reach the bottom of this down cycle. For those of you who thought we would never again see anything like the real estate crisis in the early 1990s, it appears that the losses in this recession may be even more severe. In the 1990s, prices declined 30 to 35 percent over 5 years, which was bad enough. However, the crisis we find ourselves in today is happening at an accelerated pace, and real estate prices have fallen 20 to 25 percent on a free and clear basis in just the last 3 quarters! Beyond price adjustments, reduced returns, and continued lack of credit availability, property fundamentals are de- clining throughout the industry. On a national basis, vacancy rates are up at least a half percentage point for each property type. Prices and rents are declining, absorption is negative, and capitalization rates are increasing. RERC’s analysis of this information, along with the views contributed by many CCIM Institute designees and candidates, is provided in the second quarter 2008 RERC/CCIM Investment Trends Quarterly. We thank all who responded to and completed RERC’s surveys when encouraged by the CCIM Institute. Your con- tributions to the information available to the commercial real estate industry are needed and appreciated now more than ever. Sincerely, Kenneth P. Riggs, Jr., CCIM, CRE, MAI Charles “Mac” McClure, CCIM President & CEO 2009 CCIM Institute President Real Estate Research Corporation (RERC) Chairman, The McClure Group, Inc. Investment Trends Copyright© 2009 by Real Estate Research Corporation (RERC) and the CCIM Institute. 2 Quarterly InSearchofBottom The recent Chapter 11 bankruptcy of General Growth Properties, Inc. was a particularly sad day for anyone associated with this real estate investment trust (REIT) or with the Bucksbaum family. Like many other real estate owners who have overleveraged, General Growth was caught in the worst credit and capital markets crisis since the 1930s and was not able to work its way through it without reorganizing. While we understand and appreciate the difficulty General Growth is going through, it is important to also take note of how quickly the financial situation of the nation’s second largest mall owner deteriorated, and how the challenges they have and are going through are also occurring in countless other businesses. The speed at which this recession has deepened and the severity of its damage have shocked us all, from the federal government on down. Still, in the long run, there may be more hope for General Growth to come back from bankruptcy and to preserve the majority of its assets than it will for many other industries. Although we are seeing some progress in the housing industry, there is much unraveling yet to be done at Fannie Mae and Freddie Mac, with more home foreclosures and further price declines, at least in some regions, still ahead. In addition, the stress tests administered to the large investment houses have not reflected well on the banks’ overall health, and despite some first quarter profits, there are still worrisome piles of legacy/toxic assets on the banks’ books that must somehow be disposed of. The auto industry is at a breaking point, and with the bankruptcy of Chrysler, there are fears that the bankruptcy of General Motors cannot be far behind. An average of 45 percent fewer cars and light trucks were sold by the Big Three last year than in the previous year, and it is no wonder that lower sales volume, added to their other high costs of doing business, may mean the end of this industry as we know it. When we consider the ripple effect on auto parts suppliers of steel, rubber, tech items like CD players or GPS systems, besides the leathers and fabrics that are included in the production of a car or truck, one can get an idea of the additional jobs that are likely to be lost before this is over. Other industries, including insurance, retailing, manufacturing, airlines, hotels and lodging, education, state and local governments, and even healthcare continue to see increased unemployment as well. As always, it is the loss of jobs that will have the longest-lasting impact on commercial real estate. With unemployment expected to increase at least throughout 2009, the damage to real estate fundamentals will increase accordingly, with higher vacancy, negative absorption, declining rents, and decreased values. It will be some time before we see the bottom of the commercial real estate market and know exactly what it is we have to deal with, but the majority of real estate investors remain determined to work through and overcome the new depths associated with this crisis. Investment Trends Copyright© 2009 by Real Estate Research Corporation (RERC) and the CCIM Institute. 3 Quarterly Economic Background and Investment Environment It seems that most watchers of the economy have spent the sales inched upward during the first part of the quarter, with majority of first quarter 2009 downgrading their expectations a 1.9 percent jump in January and a 0.3 percent increase in for the rest of this year. We have seen some indications of February, but March retail sales declined 1.1 percent. Per- improvement during the last month or two, but hopes for an sonal income fell 0.3 percent in March, the fifth decrease in early end to the recession were dashed when the Commerce the last 6 months, while personal savings increased 4.2 per- Department reported first quarter gross domestic product cent in March, reports the Commerce Department. (GDP) growth grew at a seasonally-adjusted annual rate of –6.1 percent for first quarter, not much better than the –6.3 As second quarter 2009 gets underway, however, there have percent rate for fourth quarter 2008. In addition to witnessing been a few signs that the economy could be starting to stabi- the worst 6-month economic performance since the 1950s, lize. Consumer confidence increased to 39.2 in April, up from this is the first time since the mid-1970s that we have seen 26.9 in March. Although this jump was considerable, the in- the economy contract for 3 consecutive quarters. dex reading overall was approximately two-thirds lower than it was 2 years ago. Still, it is a sign that consumers may be With the loss of another 674,000 jobs in March 2009 and starting to think about loosening up on the purse strings. Ac- 539,000 jobs in April, unemployment increased to 8.9 per- cording to the Conference Board, the Present Situation Index cent. Recent losses were higher than most economists had and the Expectations Index also rose in April. expected, and came from a broad array of companies like United Technologies, Nortel Networks, Pioneer, Goodyear, The Commerce Department reported that housing starts in- Smithfield Foods, Nissan Motor, Panasonic, Estee Lauder, creased 17.2 percent in February 2009 to 572,000 homes, PNC Financial Services, and others. Many economists are although starts fell 10.8 percent in March to a seasonally-ad- now predicting that the unemployment rate will reach double justed 510,000 homes. With the inventory for homes remain- digits by the end of this year. ing high, this decrease is considered a positive factor for the housing market overall in that it helps to keep overall supply On a local level, 18 of the 372 metros tracked by the Bureau from increasing further. Home prices fell 2.2 percent in Febru- of Labor Statistics (BLS) have jobless rates of at least 15 per- ary, according to the Standard & Poor’s/Case-Shiller Index, cent, and 109 metros have jobless rates of at least 10 per- but it is important to note that the pace of deterioration has cent, with El Centro, Calif., reporting an unemployment rate slowed and that a period of leveling off may be underway. of 25.1 percent, the highest unemployment rate among these metros.