October 29th Monday Report - Commercial Real Estate Forecast



Monday Report - Commercial Real Estate Forecast	October 29th, 2007

Economic Notes:

Lifestyle or Mall?

THIS WEEKS LEADS:

SCORECARD

2008 Commercial Real Estate Forecast

The commercial real estate industry has put on a brave front, but signs of pessimism about the coming months are increasing. The question has shifted from, "Will things turn?" to "How bad will the downturn get?" And, perhaps more importantly, "How will I be affected?"
The good news for retail is the answer to the last question might just be, "Not a whole lot."
The most recent assessment of market conditions came earlier this week as Chicago-based Grubb & Ellis, a commercial real estate advisory firm, on Wednesday hosted its 2008 Market Forecast Breakfast in New York City. While the sector is expected to experience some hiccups in 2008, retail will continue to rank atop investors' list of real estate interests, ahead of industrial, multifamily and office properties.
Meanwhile, in a survey of 332 commercial real estate industry professionals--conducted by DLA Piper the day after Federal Reserve Chairman Benjamin Bernanke cut the federal funds rate by a half a percentage point--a whopping 68 percent of respondents said they were bearish about the industry's prospects during the next 12 months. Asked that same question in April, only 22 percent of respondents held that position. And the credit crunch is by far the biggest concern for respondents that said they were bearish--a full 66.5 percent pointed to it in contrast with 23.7 percent saying that a sluggish economy was their main concern.
Looking forward, there are dampened expectations for GDP growth, which will affect all sectors of the economy. Michael Dee, senior vice president and national director of retail with Grubb & Ellis, estimated GDP growth at 1.8 percent for 2008, 20 basis points below this year's level. Another and the rapidly deteriorating housing market, retail sales will experience only moderate increases next year,.
Sales growth will remain in the positive territory, Dee noted, but will be below the level of recent years. In September, ICSC reported same store sales growth of only 1.7 percent--6 basis points below the year-to-date rate of 2.3 percent and 19 basis points below last year's growth of 3.6 percent. It is projecting growth in the 2.5-percent range for the holiday shopping season.
It's not expected to have much negative impact on national retail chains, Dee explained, but independent tenants will suffer, leading to a slight increase in vacancies at community and neighborhood shopping centers next year.
For the third quarter 2007, REIS, Inc. reported that vacancies edged upward 10 basis points to 7.4 percent and by the end of the fourth quarter the firm projects the national vacancy rate will hit 7.5 percent; its highest level in a decade. REIS also reported that rental growth rate of 0.4 percent during the third quarter was half that realized in the second quarter. And, brokers report seeing increases of 30 to 100 basis points on cap rates for lesser quality assets.
Nationwide retail rents, which currently average $19.32 per square foot, will stabilize in all but a few key markets, where demand still outstrips supply. Those include Washington, D.C., Baltimore, Seattle and Boston. The Urban Land Institute and PricewaterhouseCoopers LLP, in their recent report, Emerging Trends in Real Estate 2008, identified New York, Los Angeles, San Francisco, San Diego and Denver, in addition to the aforementioned cities, as the top markets in the U.S. because of their strong ties to the global economy.
On the other hand, Miami, Tampa, Phoenix, Orange County, Calif. and San Bernardino County, Calif., are likely see their retail rents decrease in 2008, Dee says, as the housing bust hit these overbuilt markets particularly hard.
All of these factors will lead to a 25 basis point to 50 basis point increases in cap rates for retail properties--well below the 100 basis point increase projected for the commercial real estate sector as a whole. The increase will also bring a respite from the recent cap rate compression. "I don't think we'll see the same kind of rates ever again," said Dee.
For 2007, year-to-date, Real Capital Analytics reports retail properties trading at an average of 6.58 percent, the lowest level since the real estate boom began in 2001. Last year, retail cap rates averaged 6.9 percent.

Source: Retail Traffic, 2007

Small towns receive retail facelift Part II

Developers are investing in sleepy New England towns, creating mixed-use town-center environments that incorporate retail, residential, office space and restaurants. Why not here?

In Franklin, Westborough, Lincoln, and other western suburbs, developers and local officials want to spend millions to revive their town centers. The goal is to create character - in a modern New England village. And it's not just about adding condos and shopping. The ingredients include outdoor dining, public art, mass transit, wrought-iron lampposts, and bike racks.

In Franklin, workers are building 27 condominiums in the city's faded downtown, with plans for 30 more in the works. Known as Franklin Center Commons, its renters are unlikely to include the mill workers and straw hat makers that put this manufacturing town on the map.

Developer John Marini hopes many will be students from nearby Dean College.

Marini is leading a $28 million reconstruction effort in the downtown, tearing down three buildings and replacing them with a mix of retail, office space, and housing. Students will use the downtown MBTA station and hang out in local cafés.

"It's going to bring kids in the daytime," Marini said. "They'll be walking. They won't have cars."

Urban planners call that "mixed-use" development, and at its most simplified, it is shops and retail centers that also include housing. Residents give retailers and developers a built-in audience. Town officials like it because it brings in revenue that doesn't burden the school system. Young professionals and empty nesters like it because it gives them smaller, more affordable places to live in the suburbs.

In Lincoln, town officials are working with the Rural Land Foundation to renovate a tired shopping center in the heart of downtown. The plan will allow the post office to expand and create a new building to house a grocery store and other commercial businesses. For a while, town officials, residents, planners, and foundation members debated whether to allow apartments or housing at the site, but that idea never made it.

Selectwoman Sara A. Mattes said Lincoln wanted to keep its rural character and slow pace. An influx of single-family homes increased the population of the one-time farming town, but it is still small, with about 5,000 residents. Mattes said most of them didn't want to see office buildings and national chain stores in the town center.

"It's not been part of the Lincoln culture," Mattes said. "We're still bemoaning the loss of our pharmacy."

Few in Westborough bemoan their own loss: the sprawling abrasives factory that sat in the heart of downtown for decades. The former brownfield will soon be a 23-acre retail and housing complex, home to dozens of chain stores, a Roche Brothers grocery store, and luxury condominiums. vInvestor and general manager Lou Petra has high expectations for its success. Known as Bay State Commons, advertisements bill it as situated in a "New England village type setting." It will include 44 condominiums in a four-story complex, with unit prices between $534,900 and $739,900.

They overlook a two-acre park, or "Great Lawn."

"This is a very good addition" to the downtown, Petra said. "It should be a win-win-win for the town, the retailers, and the developers."

Petra said the success of the project does not hinge on the number of residents living downtown, but on how well the project draws shoppers from surrounding towns. Petra said investors have studied the area's demographics and think the project is a good fit. The median family income in Westborough is $94,610, compared with $50,046 nationally, according to the US Census.

The Westborough project will also bring national chains downtown. It includes more than 300,000 square feet of retail space, not including parking, which is the equivalent of a typical Home Depot store.

Town Planner Jim Robbins said a Linens N Things, Paper Store, and Ted's Montana Grill will come in. Panera Bread, GNC, and Payless Shoes are also expected.

Robbins said there were more than 40 public meetings on the project, and it took two years to issue all the necessary permits. People saw the development as such an improvement, there were "no retail uses people didn't want," he said.

He said the city's design review board ensured that the buildings would fit in with the existing 19th century architecture. Many of the buildings have flat rooftops, some will be brick, others clapboard, he said.

"We wanted to make it unique," he said. "We didn't want it to look like it was plopped down from outer space."

In Franklin, Town Manager Jeffrey D. Nutting said people wanted the town center to be a celebration of the town's character, if not a show of its newfound prosperity.

In recent years, Franklin was one of the fastest- growing communities in the state. People were drawn to its two MBTA stops, proximity to Interstate 495, and affordable housing. The average 3-bedroom house cost $400,000 in 2006.

But at its heart, the community is a mill town that attracted factories because of its proximity to the Blackstone River.

In 2001, town leaders began looking at how to revitalize downtown, a one-way street that had become a speedway. There were a few stalwart businesses operating there, as well as a bevy of pizza parlors and nail salons.

"We're not a seaport or a tourist destination," Nutting said. "The goal is just to make it warm and friendly."

Change has come slowly. There's now a shop showcasing the work of regional artists and a boutique called Pretty In Pink. Residents would like a restaurant and a Trader Joe's market, Nutting said. And plans are underway to install sculptures to make the town center unique. Officials used a $50,000 state grant to pay for a statue of a boy waving a signature straw hat.

The town will also use a $5 million federal grant to redesign its downtown streetscape, creating two- way traffic and installing brick crosswalks and old- fashioned-looking street lamps.

Tiny Lincoln plans to make a different statement. The Rural Land Foundation will renovate one shopping complex, "the mall," as it is known locally. The mall is a modernist building that sits amid the traditional Revolutionary war era homes and white steepled churches. Town officials said it reflects a unique era in the town, which has a collection of Bauhaus period homes from the 1950s tucked into its rolling hills.

Town Planner Mark Whitehead said the community vision, and the construction plans, took five years of discussion and debate. And the outcome was this: People wanted a place where they "could run into each other and talk."

"I don't think it will be that much of a change," Whitehead said. "The new building going in there isn't all that much bigger than some of the single-family homes here."
Sound Familiar?
Can't we do the same things here?
Boston Globe, 2007

	Greetings! We're Moving! Starting November 1st we will be at: Bonneville Research 170 South Main Suite #775 (New) Salt Lake City, UT 84101 Bob - 801-364-5300 BobSpring@BonnevilleResearch.com Jon - 801-746-5706 JonSpring@BonnevilleResearch.com Fax - 801-505-4088(New) Please Note the Changes! In this issue: Commercial Real Estate Forecast Small towns receive retail facelift Part II Public Safety Grants Housing-related job losses mount in September Lifestyle or Mall? Economic notes This weeks leads Bob Springmeyer Bonneville Research

Housing-related job losses mount in September
	The housing recession brought more pain in September as mortgage lenders, construction companies and real estate firms generated more than a third of the 71,739 monthly job cuts, reports outplacement consultancy Challenger Gray & Christmas Inc. But there's more to it than a shrinking base of real estate professionals. With nearly 130,000 financial services jobs cut so far this year, real estate experts say office-using demand is softening. The financial industry has been the hardest hit by layoffs among the major industries, with 69,664 or 54% of this year's financial layoffs occurring at mortgage and subprime lending institutions. Challenger Gray & Christmas counts mortgage firms within the financial sector. "Financial firms cannot cut their payrolls fast enough, especially in the mortgage lending sector," says John A. Challenger, CEO of Challenger Gray & Christmas, in a monthly summary of layoffs published earlier today. "The heaviest job cutting has occurred over the last two months as the bottom suddenly fell out from the mortgage and subprime markets." The pace of layoffs has actually declined compared with 2006. Overall September job cuts, for example, registered 9.7% below the six-month high of 79,459 in August. Job losses were also 28.5% lower than September a year ago when employers announced 100,315 layoffs. Year to date, employers have cut 587,594 jobs, or 8.1% fewer than the 639,229 cuts announced through this point a year ago. The volume of overall year-over-year cuts may have declined, but layoffs have clearly accelerated among professions with close ties to the housing industry. Job cuts in the financial, construction and real estate sectors generated 97,509, or 16.6%, of this year's 587,594 layoffs. By contrast, these three sectors represented less than 2% of job cuts for the first nine months of 2006. A ripple effect from a shrinking job base in financial services is slowing office absorption. National office vacancy leveled out at 13% in the third quarter after 13 consecutive quarterly declines, reports Grubb & Ellis. Another troubling sign: The volume of space available for sublease increased for the first time in five years to 77 million sq. ft., up from 73 million sq. ft. in the previous quarter. That up-tick suggests that layoffs have curtailed demand for new space, says Robert Bach, senior vice president of research at Grubb & Ellis in Chicago. "It's pretty evident to me that the layoffs we're seeing in the financial services sector are beginning to have an impact on the office market," Bach says. "The question is, how much deeper will that go? How many more layoffs will we see, and over what time period?" Given continued depreciation in home prices and mounting residential foreclosures, Challenger predicts that layoffs will cut deeper for a while. "Even if the worst of the crisis is over, as some are saying, we could continue to see heavy job cuts in the financial sector through the end of the year," he notes in the new report. "Additionally, we are seeing housing-related job cuts spread to other industries such as insurance, consumer product companies and retailers," he adds. While the totals are still small, Challenger Gray & Christmas has tracked 1,900 housing-related layoffs at insurance companies so far this year, with another 1,215 job cuts in consumer products and 985 in retail. Diane Swonk, chief economist at Mesirow Financial, says the concentration of layoffs in mortgage lending, construction and real estate shows that most of this year's downturn has been contained within the housing industry. "So far, the economy outside of housing has weathered the subprime crisis relatively well," she says. Even so, Swonk agrees with Challenger that the housing slump may drag down more sectors in the coming months. Says Swonk: "The dust has yet to fully settle." Source NREI Newsline, 2007 Public Safety Grants Improve Law Enforcement Officer Safety! Personal Protective Equipment POSTED: 10/16/2007 FUNDING SOURCE: Dept. of Justice ELIGIBILITY: Nonprofit and public agencies, including states $ AVAILABLE: N.A. GRANTS AVAILABLE: N.A. MAX GRANT SIZE: $500,000 DEADLINE: 11/14/07 CONTACT INFORMATION: http://www.ncjrs.gov/pdffiles1/nij/sl000811.pdf DESCRIPTION: Funding to research, develop, and demonstrate technologies that will enhance the safety of law enforcement officers and other criminal justice practitioners. Grants for Fire Departments!! Assistance to Firefighters Grant Program POSTED: 10/17/2007 FUNDING SOURCE: Department of Homeland Security ELIGIBILITY: Fire departments and nonaffiliated EMS organizations $ AVAILABLE: N.A. GRANTS AVAILABLE: N.A. MAX GRANT SIZE: $500,000 DEADLINE: 11/30/07 CONTACT INFORMATION: Grants to enhance fire departments' and nonaffiliated EMS organizations' firefighting and emergency response needs by funding additional tools and resources necessary to more effectively protect the health and safety of the public.

Economic Notes:
	International Business Confidence Global business confidence has stabilized in recent weeks, but remains low and consistent with a slowly expanding economy. Confidence is weakest in the U.S., where there is no indication that sentiment is improving since being hit hard during this summer's subprime financial shock. Asian and South American confidence is notably stronger. Sentiment is weakest among firms in housing and financial services, and strongest among high-tech businesses. Businesses continue to respond very negatively to the survey's broader questions regarding present business conditions and the six-month outlook, but are more upbeat when responding to more specific questions regarding investment and payrolls. Investor Optimism Index The Fed's decision to cut interest rates in September is helping gradually repair investor psyches. In October, the UBS Index of Investor Optimism inched two points higher to 70. Despite the slight improvement, investor sentiment remains fragile as the UBS index has fallen over 30 points since the beginning of this year. Durable Goods (Advance) New orders for manufactured durable goods fell 1.7% in September-the consensus forecast was calling for a 1.5% increase. August durable goods were revised down even further to show a 5.3% drop. Shipments fell for the second consecutive month by 2% and August shipments were revised down further as well. Core capital goods orders and shipments both posted gains over the month, rising by 0.4% and 1% respectively. The headline drop mainly reflects weakness in transportation orders, which had been expected to bounce back in September. Jobless Claims Initial jobless claims gave back a little of the previous week's increase, dropping 8,000 to 331,000, a move in the direction of expectations. Existing Home Sales The housing market continues to weaken, with existing home sales marching steadily downward. Sales declined by 8% in September from the previous month. The 5.04 million annualized units are slightly worse than expected. The months of homes available for sale increased to 10.5, the highest since 1999. The median house price dropped by 4.2% year over year. New Home Sales (C25) New home sales reflect a weak housing market, although revisions to August data suggest the worst of the downturn was in August. September new home sales are up 4.8% from a downwardly revised August figure. September sales clocked in at 770,000 annualized units. On a year-ago basis, sales are still quite weak, down by 23%. Census revised downward August sales by a large 8%. Months of supply declined to 8.3. The median new house price is up by 5% compared to one year ago. MBA Mortgage Applications Survey Mortgage demand remained unchanged in the week ending October 19. Purchase applications decreased 3.1% and refinance applications increased 4.0%. Application activity is relatively quiet and stable, with the decline in purchase applications negating the gains in refinance applications. Chain Store Sales Chain store sales fell 1.5% in the week ending October 20, the largest decline in 22 weeks and more than reversing the prior week's large gain, according to the ICSC. Year-over-year growth fell to 2.2% despite easing comparisons. Warm weather and higher gasoline prices were cited as drags. Oil and Gas Inventories Crude oil inventories fell dramatically by 5.3 million barrels for the week ending October 19, according to the Energy Information Administration, below expectations of a 1.0 million barrel build. Distillate supplies fell by 1.8 million barrels, below expectations of a modest decline. Gasoline inventories fell by 2.0 million barrels, below expectations of a modest build. Refinery activity fell from 87.3% to 87.1%. Today's report is bullish. Weekly Natural Gas Storage Report Underground storage of natural gas increased by 68 billion cubic feet during the week ending October 18. This was a higher build than the market consensus of a 56 Bcf increase in inventories. With the gain, inventories are now 7.2% above the five-year average. This report will likely have a bearish impact on prices. Source: Economy.com, Financial Times 2007

Lifestyle or Mall?
	Depends on who your customer is! Women over 35 prefer Lifestyle Market Leaders and Teens prefer Malls Retailers are still big on lifestyle centers and other open-air developments, speakers here said that the International Council of Shopping Centers' fall conference. Some said, though, that regional malls are still preferred shopping venues if the development is a market leader. In the case of apparel retailer Chico's FAS, which targets women over 35, management found that malls were no longer catering to the demographic it was trying to target, said Michael Elleman, that company's SVP of real estate. Malls have become more teen- oriented and the parking configurations don't allow for quick in-and-out shopping. "She doesn't want to battle the regional mall," Elleman said in respect to his company's 580-store chain with just 30% of its units in malls. However, at the company's 280-store White House/Black Market concept, which caters to younger women as well as the over-35 age group, half in are malls and half are in open-air developments. Some developers are trying too hard to force upscale lifestyle centers in areas that don't have the demographics to support those stores, Elleman said. "I think we need to be very careful in some of the greener areas." In the past two years, Ann Taylor Stores has made a bigger effort to enter lifestyle centers, especially with its 464-unit Loft concept, said Nelson Daza, director of lease administration at that apparel chain, which has a similar consumer to Chico's. At Ann Taylor about half of its stores are in malls, while the other half are in open-air locations. But Daza still has faith in enclosed venues. "I still believe that our client is looking for a higher-end shopping-mall experience," he said. What has changed is what the customer is looking for in that experience. Now venues are expected to have more entertainment choices, such as gourmet grocers, theaters and bookstores, he said. Times are certainly different than before the 1990s, when lifestyle centers started popping up across the country and regional malls were the main shopping option, observed a partner at Westerville, OH-based consulting firm Asset Strategies Corp. "Retailers had it very easy for 40 years," he said. "For 40 years, retailers just had to follow developers." ICSC, 2007

THIS WEEKS LEADS:
	Anchor Blue Hub Distributing, Inc. trades as Anchor Blue at 216 locations throughout AZ, CA, CO, FL, ID, NM, NV, OR, TX, UT and WA. The stores, offering moderately priced, casual apparel for young men and women, occupy spaces of 4,500 sq.ft. to 5,500 sq.ft. in malls and power centers. Growth opportunities are sought throughout AZ, CA, CO, FL, NV, OR, TX and WA during the coming 18 months. Typical leases run seven years. Preferred cotenants include food courts and department stores. Preferred demographics include a population of 250,000 within five to seven miles earning $50,000 as the average household income. Major competitors include American Eagle, Hollister and Pacific Sunwear. For more information, contact Ken Monahan, Hub Distributing, Inc., PO Box 5996, Ontario, CA 91761-7657; Web site: www.anchorblue.com. Nordstrom Rack Nordstrom, Inc. trades as Nordstrom Rack at 51 locations throughout AZ, CA, CO, FL, GA, HI, IL, MD, MI, NV, NY, OR, PA, TX, UT, VA and WA. The discount stores occupy spaces of 30,000 sq.ft. to 40,000 sq.ft. in malls and power centers. Growth opportunities are sought throughout the existing markets during the coming 18 months. For more information, contact Tony Sekora, 1700 7th Avenue, Suite 1000, Seattle, WA 98101-4407; 206-303-2095, Fax 206-303- 4419. Breadeaux Pizza Breadeaux Pisa, Inc. trades as Breadeaux Pizza at 106 locations throughout AR, AZ, FL, IA, IL, KS, MO, NE, TX and British Columbia, Canada. The pizzerias occupy spaces of 2,200 sq.ft. in freestanding locations and specialty and strip centers. Growth opportunities are sought throughout the Midwestern region during the coming 18 months. Typical leases run five years. A vanilla shell and tenant improvement allowance are required. Preferred demographics include a population of 4,000 within two miles earning $30,000 as the average household income. For more information, contact Lucille Wahlert, Breadeaux Pisa, Inc., 1806 Oak Ridge Circle, St. Joseph, MO 64506; 816-364-1088, Fax 816-364-3739; Web site: www.breadeauxpizza.com.

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We're Moving!

Starting November 1st we will be at:
Bonneville Research
170 South Main Suite #775 (New)
Salt Lake City, UT 84101
Bob - 801-364-5300
BobSpring@BonnevilleResearch.com

Jon - 801-746-5706
JonSpring@BonnevilleResearch.com
Fax - 801-505-4088(New)
Please Note the Changes!

2008 Commercial Real Estate Forecast

Small towns receive retail facelift Part II

Developers are investing in sleepy New England towns, creating mixed-use town-center environments that incorporate retail, residential, office space and restaurants. Why not here?

Public Safety Grants

Improve Law Enforcement Officer Safety!

Grants for Fire Departments!!

Depends on who your customer is!

Women over 35 prefer Lifestyle

Market Leaders and Teens prefer Malls