Monday, October 09, 2006

Commercial Real Estate: The Next Domino?

The Sacramento Business Journal looks at the growing impact of Sacramento's sinking housing market:

Housing downturn will likely hit offices
Thinning brokerages threaten leases

Sacramento's commercial property owners, who have relied heavily on housing-related businesses the past six years, are starting to feel the heat now that the market has cooled. A national research report released by Grubb & Ellis last week indicates that almost a fifth of recent local leases are in housing-related service sectors such as real estate brokerages, mortgage and title companies. The report's authors predict the effect of a housing downturn will be modest nationally, but it has the potential to be more painful in high-growth markets such as Sacramento.

That pain may last awhile, too. One prominent local real estate broker predicts a two-year flattening of housing prices. Housing-related business made up 19 percent of leasing activity in Greater Sacramento between 2000 and the second quarter of this year, according to the survey. That puts Sacramento tied with Oakland as the nation's fifth-most housing-reliant market...

The report cites cases in Sacramento of 5,000-square-foot offices occupied by only two or three employees. The research found "as many as one-half of local mortgage companies wanting to downsize or close altogether."

"The housing market in Sacramento has been growing so fast for so long that housing-related leasing is a bigger slice of the pie," said Robert Bach, senior vice president of Grubb & Ellis in Chicago. The region's pain could be significant. "Nobody knows how far down the housing market is going to go," he said. "It looks like we're not going to get that soft landing in housing that everyone was hoping for..."

"In times like this, you have to work," said Jeff Tarbell, president of ATM Mortgage. His Sacramento office is down to 18 brokers from 23 a year ago. The veterans have stayed and the newer agents have moved on. He also owns a few buildings, and he's had a couple of small realty and mortgage company tenants that closed down in the past year. He expects to see more of that in the region. "I think there are a lot of companies where, when the lease expires, they are not going to renew," Tarbell said.


Anonymous said...

Suppliers, Contractors, SubContractors, Government Agencies directly supported by the "booming" construction business, Highways construction, Utilities, SCHOOLS and as mentioned Banks, Mortagage Companies and Brokers all ae going to go down over the Housing debacle.

What would one expect when prices are bid up by Real Estate Crooks offering no money down, interest only, "low doc" loans? Pity those "suckers" who bought the Real Estate Lies and Flim Flam show.

Anonymous said...

This is just momentum getting underway and gathering steam. If you listen to the talking heads on CNBC, real estate has bottomed. No one wants to talk about the fallout around the periphery of the market and what it will do to the overall economy. If the Dot.Bomb debacle created a recession, the real estate bubble that lasted twice as long will make those days look like good times. When the leases don't get renewed do the employees that worked in those buildings get to keep their jobs? A drop in the overall market of 30% as predicted by some, will equate to hundreds of thousands of jobs that will be lost. Quite frankly, we need a recession to weed out all the excesses. Unfortunately, it could be a lot deeper than many imagine.

Anonymous said...

I feel bad for all the first time homeowners that purchased the last couple of years. Most will be stuck upside down in equity nightmare for fifteen years. Welcome to mortgage prison!!

Anonymous said...

Judging by the kind of traffic I see in the Sacramento area (it's staring to feel very congested since the last few months), I really doubt that housing will have anything but a soft landing. These people must live somewhere which is what I'm guessing has created the demand for housing in this area. Inventory levels look like they are leveling off.

JR said...

Anon 9:56,

You have a great observation. I was just thinking the same thing last week. Traffic continues to be very busy in this area. I remember in 1990, thinking we needed a "good" recession to "weed out all the excesses" like Anon 6:50 posted above you. Never again will I think such a thing. By mid 1994 life had changed drastically, no jobs, outmigration, 30% reduction on property values....but hey, no more traffic jams!! I have come to appreciate traffic for what it symbolizes: jobs for all.

I don't think traffic is a leading indicator, though. It lags the direction of the economy by 6 months to a year. That being said, you are right about traffic today and a lot of construction starts must have been permitted in the first quarter, because there is a lot of activity on the streets.

The true market direction will not really be known until next year, as 2006 is in the books. Mid 2007 will tell us if we reached a plateau or we are going into a dive. One thing is certain though, and that is prices will not be appreciating.

Anonymous said...

JR. I tend to agree that it will take time to wash out whatever's coming with regard to the RE market. If it took five years to peak, then some appreciable time thereafter can be expected before we see some equilibrium. Permitting and new construction aside, people have to begin buying homes in order for a bottom to be had, soaking up the inventory thats out there. That doesn't appear to be happening right now. At least not at these home prices. All the new home construction going will only add inventory to one that needs to consumed. As far as traffic, if it is a telltale and we are in the first couple of innings of this slowdown, traffic wouldn't be any different than what you have stated. I won't believe that a market that went straight up for five years, levels off nicely, balances to the favor of all, and in the end... no one gets hurt. It would be one of the odd ball markets of all time. But, hey, this one could be one the economists study for decades because of its orderly and predictable "soft landing." Patience will reward those that wait for this thing to settle out.

Anonymous said...

level off

soft landing


some folks will not pay attention,

these blogs are full of them, "flippers in trouble", "upside down", "short sale"...LOL...

"Flipper" has all the info you need...and someone, whether it was "Flipper" here or somewhere else posted about "Anatolia" not Turkey but Rancho Cambodia, where sellers are being undersold by the builder trying to unload and the sellers are down some 100gs....

The entire market has gone to hell, but the Zombie Sellers still in the market refuse to believe..."You're not in Kansas no mo"...

somebody is selling one of those Granite Bay charmers, crummy 3 bedroom 2 bath for 1.3 million, you offer them 385, cash, take it or leave it and then walk...

Anonymous said...
This comment has been removed by a blog administrator.
Lander said...

(hey admin, why not let a few provocative comments post instead of trying to sanitize this blog?
You DO want some free idea exchange. . . ? maybe not)

This blog has a comment policy.

Anonymous said...

Anyone care to comment on what has caused the inventory to drop?

Happy Renter said...

"Anyone care to comment on what has caused the inventory to drop?"

It always falls off this time of year. People pull there homes and will relist in the spring. Try pricing trends to see a graph of last years inventory cycle.

Oh,and get a screen name.

Anonymous said...

I know of somone in the sacramento area near the antelope, citrus heights, roseville area very close to the new Walmart on Antelope and Roseville Rd. House has been on the market since Jan. 06. Just fell out of escrow recently. Not good since they purchased a new house months ago before this one has sold.

Anonymous said...

KB Homes only has $400 million left on their Line of Credit!!!

Our calculations show they will burn through that in about 3 months. However, given they are in default on their earnings statement they will not be able to borrow anymore.

They could be in bankruptcy by the 1st of the year.

Liquidity and Capital Resources.

We fund our business activities with cash flows generated from our operations
and from debt financing, including through the issuance of publicly-traded notes
and by entering into credit agreements to borrow funds from banks and other
financial institutions. Currently, our primary credit agreement is a $1.5
billion unsecured revolving credit facility (the “$1.5 Billion Credit
Facility”), which allows us, from time to time and subject to certain conditions
precedent, to draw funds as needed to support our business. As of October 10,
2006, we had $600.0 million of outstanding borrowings under our $1.5 Billion
Credit Facility and $487.0 million of outstanding letters of credit, leaving us
with $413.0 million of available capacity.

The delayed filing of our Third Quarter 10-Q may impair our ability to
raise external financing to support our business. The delayed filing of the
Third Quarter 10-Q will cause us to not be current in our filings required under
the Exchange Act which will prevent us from using a Form S-3 registration
statement for the public offering of new debt or equity securities until we have
filed the Third Quarter 10-Q and have been current in our filings of all other
required Exchange Act reports for a period of 12 months.

In addition, the delayed filing of the Third Quarter 10-Q and the
unavailability of third quarter financial statements may result in a default
under the indentures governing our senior and senior subordinated notes and our
credit agreements. As a result of such

delay or unavailability, we may be unable to obtain additional borrowings under
our $1.5 Billion Credit Facility. If uncured, such delay or unavailability could
also result in acceleration of repayment of our currently outstanding
indebtedness. We do not know if any indenture trustee, administrative agent of
any of credit agreements or creditor will assert that the delayed filing of our
Third Quarter 10-Q or the unavailability of our third quarter financial
statements constitutes a default in the performance of these agreements.
However, because our indentures and credit agreements contain cross-default and
cross-acceleration provisions, if any indenture trustee, administrative agent,
creditor or group of creditors were to be successful in claiming we had
defaulted and we did not cure such default within the grace period available, we
would be required to seek a waiver or amendment, to refinance all or part of our
existing debt and/or to pay fees or penalties, which, individually or in
combination, may have a materially adverse effect on our liquidity.

Historically, we have generated greater cash flows from our business
operations in our fiscal fourth quarter relative to other quarters because we
make a proportionately greater number of unit deliveries in that period. We
currently anticipate that our 2006 fourth quarter will be consistent with our
historical experience and, in conjunction with a planned reduction in investment
in land inventory in the fourth quarter relative to the prior periods of the
year, we believe, subject to the foregoing, that we will have sufficient
resources to meet our current business needs.