NAI Farbman
 

This issue

Commercial Real Estate Deal - An IOU Economy

by Andy and David Farbman

The United States is in more debt today than it was during the Great Depression. According to a report in the Dallas Morning News, the total amount owed by consumers, businesses, governments and financial institutions is $34.4 trillion, a whopping three times greater than the nation's gross domestic product of $11.3 trillion. Back in 1933, debt was about two-and-a-half times the GDP, according to data from the Gabelli Mathers Fund. Does High Debt Automatically Spell a Troubled Economic Future?

The heady 1920s combination of investing with borrowed money, coupled with a stock market bubble and a shaky banking system proved highly combustible and ultimately led to the sustained economic agony of the Great Depression. During the depression, the sinking dollar made it difficult, sometimes impossible, for Americans to pay back their debts. Today the dollar is weaker than it has been, but isn't deflating at the death-defying pace of the 1930s. Still, many experts caution against what they see as American over-indebtedness. Corporate debt is at a record $5 trillion. Consumers have doubled their debt over the last decade to a record $9.4 trillion. Federal debt is at $4 trillion now, but is expected to more than double to $10 trillion by 2014. Banks, credit unions, and other financial institutions account for $11.4 trillion in debt. The good news of all this is that right now interest rates remain relatively low. If they rise substantially, the economy could take a slide. We'll continue to watch these trends, and I'm sure you will too.

All the best,

Andy and David Farbman
 

Insurance - Rough Road for Big Insurers

New York Attorney General Eliot Spitzer recently charged Marsh & McLennan Companies and other big property and casualty insurance brokers like AIG, with bid-rigging and steering clients to insurers that were kicking back money to Marsh & McLennan. Because the company took steps on its own to resolve the legal and regulatory issues, including replacing its CEO, the New York AG eventually dropped the charges. Because the case never made its way to court, the salient facts may never become public, leading some to wonder out loud whether the alleged improprieties in the property and casualty insurance industry were as serious as Spitzer charged. "Mr. Spitzer increasingly views himself as all three branches of government -- legislator, regulator and judge," according to the editorial page of the The Wall Street Journal. "But he has yet to explain how the public benefits from having one man set the rules, with little debate and no political check or balance."
 

Outsourcing - Outsourcers Seek Real Estate Redundancy

While direct foreign investment has flooded into India, some companies are hedging. India's workforce, drawn from a total population of over one billion, is largely English-speaking, highly skilled and low-cost. In spite of the advantages, companies are looking to build backup facilities in other nations such as the Philippines, where Filipino and English are the official languages. The subcontinent's natural hazards, such as monsoons and earthquakes, give some investors pause. As do man-made hazards, including an ongoing conflict with Pakistan over the disputed Kashmir region and sporadic conflict with armed Nepalese Maoist insurgents. Cautious outsourcers are opting to include a "Plan B" into their business plans in case of an emergency. The Philippines is viewed by many as just such a plan, even though the Pacific archipelago state has hazards all its own, including typhoons, tsunamis and Al Qaeda-linked Muslim terrorist networks. "When choosing a location, any location, it is important to remember that there is always a certain degree of risk," said David Farbman, of NAI Farbman. "The important thing is to spread your risk, not to keep all of your eggs in one basket, especially in a world where almost every basket has a few holes in it."
 

Technology - Where the Earnings Are

The Indus Valley is fast becoming the Silicon Valley of the 21st century, and Mumbai is shaping up to be the San Jose of India. A recent report from Goldman Sachs predicts that India will be the world's third largest economy by 2035. If earnings at some Indian companies are any indication, Goldman Sachs may well be right. India's largest IT services firm, Mumbai-based Tata Consultancy Services, saw a stunning 52 percent profit surge in Q2 2004 on a 44 percent revenue gain. "Multinationals or multinationals-in-waiting would do well to include India as part of their strategy," said Andy Farbman of the NAI Farbman. "But India, as well as other fast-growing economies such as Brazil and China, are very different environments with many cultural and legal peculiarities that require global expertise in order to be dealt with effectively."
 

Global View - Americans Buying European Real Estate Loans

There is increasing interest among U.S. investment banks and real estate investment funds in scooping up sagging European loan portfolios. Some analysts believe that Loan Star Funds' recent purchase of €3.6 billion worth of real estate loans from Hypo Real Estate Holdings AG in Germany is just the first move in this direction. These loans are underperforming due to Germany's stubbornly sluggish economy, but foreign investors who sense an upturn in Europe's struggling real estate markets are looking to cash in in the hopes of making a quick profit. Sellers, meanwhile, hope to clean up their balance sheets by jettisoning dubious loans.
 

Industrial - Vacancy Rates Down in Q3

Vacancy rates for industrial properties were down 10 percent across the United States, according to data from the CoStar Group. Leading the pack in net absorption were warehouse properties, accounting for 89 percent of the 43.6 million square feet absorbed in the industrial sector in Q3 2004. Meanwhile, average industrial rents are declining nationwide. While some major projects and proposals, including a new proving ground near Fowlerville and Visteon's planned expansions in Sterling Heights, may be harbingers of better days that lie ahead, Detroit's overall industrial real estate market is generally a laggard.
 

Labor Markets - Q3 Employment Picture Uncertain

According to data from the U.S. Department of Labor, job growth in Q3 averaged 103,000 new jobs per month, with 96,000 new jobs added in September. However, according to PNC Real Estate Finance, this average is insufficient to absorb new entrants into the job market. Job growth of 130,000 to 150,000 per month is necessary just to keep pace with U.S. population growth. To make up for job losses from the recent recession, while providing employment opportunities for a burgeoning population, growth must be greater than 200,000 new jobs per month. The Detroit market continues to lag behind national trends in terms of job growth. While the U.S. created 128,000 new jobs in August, Detroit lost almost 40,000 jobs. "Employment figures can be viewed through the prism of corporate real estate as a leading indicator," said Andy Farbman of NAI Farbman. "When you have solid absorption rates, usually there are solid employment numbers underpinning that. But when there aren't enough jobs to go around in a community, that means that fewer people are buying manufactured goods, patronizing retail shops, or otherwise contributing to the economy as either consumers or producers, so the real estate market suffers."
 

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