by Calculated Risk on 10/06/2009 11:43:00 AM

From Bloomberg: Manhattan Office Vacancies Reach Five Year High, Cushman Says

Manhattan’s third-quarter office vacancy rate hit a five-year high ... The rate rose to 11.1 percent, the highest since the third quarter of 2004, New York-based broker Cushman & Wakefield said in a statement today. Rents fell 5.2 percent from the second quarter to $57.08 a square foot and were down 22 percent from a year earlier.
emphasis added

Yesterday, NY Fed President commented about falling commercial real estate prices:

First, the capitalization rate—the ratio of income to valuation—has climbed sharply. At the peak, capitalization rates for prime properties were in the range of 5 percent. That means that investors were willing to pay $20 for a $1 of income. Today, the capitalization rate appears to have risen to about 8 percent. That means that the same dollar of income is now capitalized as worth only $12.50. In other words, if income were stable, the value of the properties would have fallen by 37.5 percent. Second, the income generated by commercial real estate has generally been falling.

According to Cushman, rents are off 22% over the last year (probably more since the peak), and combined with the higher cap rate, Dudley's estimate suggests office building prices have fallen by half or more in New York.

There was a little good news in the Cushman report:

Sublease space declined to 11.1 million square feet from 11.4 million at mid-year, the first drop since the end of 2007, Cushman said.

“A decline in sublease space is indicative of the market beginning to move towards stabilization,” said Joseph Harbert, chief operating officer for Cushman’s New York metropolitan region.

However the vacancy rate is still expect to rise further, perhaps to 14% in New York according to Cushman.

The national office vacancy data from REIS will be released soon.

by Calculated Risk on 10/06/2009 08:50:00 AM

From the National Retail Federation: NRF Forecasts One Percent Decline in Holiday Sales

The National Retail Federation today released its 2009 holiday forecast, projecting holiday retail industry sales to decline one percent this year to $437.6 billion.* While this number falls significantly below the ten-year average of 3.39 percent holiday season growth, the decline is not expected to be as dramatic as last year’s 3.4 percent drop in holiday retail sales ...

“The expectation of another challenging holiday season does not come as news to retailers, who have been experiencing a pullback in consumer spending for over a year,” said NRF President and CEO Tracy Mullin. “To compensate, retailers’ focus on the holiday season has been razor-sharp with companies cutting back as much as possible on operating costs in order to pass along aggressive savings and promotions to customers.”

* NRF defines “holiday sales” as retail industry sales in the months of November and December. Retail industry sales include most traditional retail categories including discounters, department stores, grocery stores, and specialty stores, and exclude sales at automotive dealers, gas stations, and restaurants.

Notice the focus on cost controls, and that suggests retail hiring for the holiday season will be weak.

Here is a repeat of a graph from a post a couple weeks ago: Retail Hiring Outlook "Jobs Scarce"

Click on graph for larger image in new window.

Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. This graph shows the historical net retail jobs added for October, November and December by year.

Based on the NRF forecast, seasonal retail hiring might be around 400 thousand again in 2009.

More from Ylan Mui at the WaPo: Retailers Hope for Holiday Cheer

The retail federation's forecast "is a good number in that it shows stabilizing in sales," NRF spokesman Scott Krugman said. "However, it also acknowledges that the recovery is not going to be consumer-led."

Typically recoveries are consumer led, and then the increase in end demand eventually leads to more business investment. Not this time. Just another reminder that the typical engines of recovery are still misfiring.

by Calculated Risk on 10/06/2009 12:20:00 AM

From Reuters: US apartment vacancy rate hits 23-year high-report

The U.S. apartment vacancy rate rose to 7.8 percent in the third quarter, its highest since 1986, ... according to Reis.
...
"It makes me wonder whether the avalanche is on its way for office and retail (real estate) unless things change really quickly and really drastically," Victor Calanog, Reis director of research, said.

Reis still expects the U.S. apartment vacancy rate to pass the 8 percent mark by perhaps next quarter but certainly by next year, Calanog said. That would make it the highest vacancy rate since Reis began tracking the market in 1980.

In the third quarter, the U.S. apartment asking rental rate fell 0.5 percent to $1,035 per month, the fourth consecutive declining quarter. ...

Note: the Reis numbers are for cities. The overall vacancy rate from the Census Bureau was at a record 10.6% in Q2 2009. This also fits with the NMHC apartment market survey.

Rising vacancies. Falling Rents. Here comes the Fed's nightmare.

by Calculated Risk on 10/05/2009 10:48:00 PM

From Vanity Fair: Wall Street’s Near-Death Experience (ht jb)

The Vanity Fair piece is an excerpt from Andrew Ross Sorkin's "Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System---and Themselves" to be released on October 20th.

Sunday, September 21, 2008: The Last Stand
...
Upstairs, [Morgan Stanley CEO John] Mack was on the phone with Mitsubishi’s chief executive, Nobuo Kuroyanagi, and a translator trying to nail down the letter of intent. His assistant interrupted him, whispering, “Tim Geithner is on the phone—he has to talk to you.”

Cupping the receiver, Mack said, “Tell him I can’t speak now. I’ll call him back.”

Five minutes later, Paulson called. “I can’t. I’m on with the Japanese. I’ll call him when I’m off,” he told his assistant.

Two minutes later, Geithner was back on the line. “He says he has to talk to you and it’s important,” Mack’s assistant reported helplessly.

Mack was minutes away from reaching an agreement. He looked at Ji-Yeun Lee, who was standing in his office helping with the deal, and told her, “Cover your ears.”

“Tell him to get fucked,” Mack said of Geithner. “I’m trying to save my firm.”

The Vanity Fair excerpt is a page-turner.

by Calculated Risk on 10/05/2009 08:00:00 PM

From NY Fed President William Dudley: A Bit Better, But Very Far From Best

... My assessment of where things stand today is mixed. On the positive side, the financial markets are performing better and the economy is now recovering. ...

On the negative side, the unemployment rate is much too high and it seems likely that the recovery will be less robust than desired. This means that the economy has significant excess slack and implies that we face meaningful downside risks to inflation over the next year or two. ...

... I also suspect that the recovery will turn out to be moderate by historical standards. This is a disappointing outcome in that growth will likely not be strong enough to bring the unemployment rate—currently 9.8 percent —down quickly.

I see three major forces restraining the pace of this recovery. First, households are unlikely to have fully adjusted to the net wealth shock that has been generated by the housing price decline and the weakness in share prices. ...

The shock to household net worth seems likely to have several important implications for household behavior. The shock creates a risk that the household saving rate could increase further. For example, during the period from 1990 to 1992, the household saving rate averaged about 7 percent of disposable personal income, considerably higher than the 4.3 percent average rate during the first half of this year. If the household saving rate were to rise, then consumption would rise more slowly than income, making it more difficult for the economy to develop strong forward momentum. ...

The second force that could restrain the recovery is the fiscal outlook. The fiscal stimulus that is currently providing support to economic activity is temporary rather than permanent. This has to be the case if we are to ensure that fiscal policy is on a sustainable path over the long-run. This means that the positive impulse from fiscal stimulus will abate over the next year.

The third, and perhaps most important factor, is that the banking system has still not fully recovered. Bank credit losses lag the business cycle and are still climbing. ...

The commercial real estate sector is under particular pressure because the fundamentals of the sector have deteriorated sharply and because the sector is highly dependent upon bank lending. In terms of the fundamentals, there are two problems. First, the capitalization rate—the ratio of income to valuation—has climbed sharply. At the peak, capitalization rates for prime properties were in the range of 5 percent. ... Today, the capitalization rate appears to have risen to about 8 percent. ... Second, the income generated by commercial real estate has generally been falling. ...

The decline in commercial real estate valuations has created a significant amount of “rollover risk” when commercial real estate loans and mortgages mature and need to be refinanced. ... This means that more pain likely lies ahead for this sector and for those banks with heavy commercial real estate exposures.

For small business borrowers, there are three problems. First, the fundamentals of their businesses have often deteriorated because of the length and severity of the recession—making many less creditworthy. Second, some sources of funding for small businesses—credit card borrowing and home equity loans—have dried up as banks have responded to rising credit losses in these areas by tightening credit standards. Third, small businesses have few alternative sources of funds. ...

All of these factors will tend to inhibit the pace of the economic recovery. Given that the recovery is starting with an abnormally large amount of slack, and the pace of recovery is not likely to be robust, this means the economy is likely to have significant excess resources for some time to come. As a result, the balance of risks to inflation lies on the downside, not the upside, at least for the next year or two.
...
In summary, I believe the current balance of risks around the inflation outlook lie to the downside due to the very low level of resource utilization and the fact that long-run inflation expectations remain stable. This balance of risks is problematic because the current level of inflation is already so low—the core PCE (personal consumption expenditures) deflator has increased only 1.3 percent over the past 12 months. Thus, we would not need much of a decline in inflation to run the risk of an outright deflation. Outright deflation, in turn, would be a dangerous development because it would drive up real debt burdens and make it much more difficult for households and businesses to deleverage.
emphasis added

There is much more in the speech about resource slack and the Fed's tools "to exit smoothly from the very low federal funds rate".