NATIONAL AND INTERNATIONAL

Even with the world in recession, we are still seeing some impressive real estate deals being made. According to Real Capital Analytics, deals from all over the world were consummated over the last twelve months.

Last quarter I reported that Cambridge Energy Research had predicted that they thought the outlook for natural gas was in an oversupply because of the Barnett Shale in Fort Worth and the advanced technology which allows the industry to get significant increases from shale deposits across the country and around the world. That prediction was reinforced this quarter by a report from The Potential Gas Committee, a group headquartered at the Colorado School of Mines. The group believes that the US now has a total resource base of 1,836 trillion cubic feet of natural gas, about 515 Tcf more than the organization’s 2006 estimate of 1,320.9 Tcf, a 39 percent increase. The full report can be accessed on the Web at http://www.mines.edu/Potential-Gas-Committee-reports-unprecedented-increase-in-magnitude-of-U.S.-natural-gas-resource-base. It is worth reading if you believe energy can play a huge effect on inflation in the US.

And to further complicate things, the International Energy Agency stated this month in its 2009 Medium-Term Oil Market report that world oil demand will grow an average of 0.6 percent, or 540,000 barrels a day annually for the next five years, reaching 89 million barrels a day in 2014. This is a significant downward revision from just a year ago when the group predicted a 1.6 percent annual increase per year from 2008 to 2013. Again, cheap energy will be a help in keeping prices down across the board. Let’s just hope that the weak economy and pull back in exploration does not translate into energy shortages later down the road.

And, speaking of energy, the Iraqi government put some of the best oil and gas exploration deals on the block on June 30 in the most significant attempt to open up the country’s oil industry since it was nationalized by Saddam in 1972. The government set a price reserve. Only one contract was taken, a pairing of BP and China National Petroleum Corp for the largest field offered, Rumaila near the southern city of Basra which has a proven reserve of 17 billion barrels. Evidently the other deals were thought to be too dangerous.

The Consumer Confidence Index went down this month after rising smartly since March and now stands at 49.3 from 54.8 in May. This is significant because so much of the US economy, about 70%, depends upon consumer spending in stores. And, we are now saving as a nation, much to the chagrin of our President and his team. The good thing about this is that it will make our citizens much more credit worthy once they decide to start spending again. But until then, the cash registers are ringing much less.

Taken from the Conference Board Website.

The nation is still shedding jobs. Unemployment has been on a steady increase since January 2007. It doesn’t look like this will change anytime soon.

I saw one package of loans going to auction in California this quarter. That is the first instance of big loan deals I have seen going to market. Commercial loans will be next now that the residential loan portfolios are being worked through to some extent. When will it stop? I don’t know for certain but I would bet that we still have another 18-36 months of pain in the commercial real estate market.

The next chart from Real Capital Analytics shows the difference in financing sources for commercial real estate since this crunch hit us. Note that CMBS (commercial mortgage backed securities) went from about 40% of the market to nearly none today. And this happened almost overnight.

In an attempt to rein in bad loans and defaults in the future, President Obama announced that he will create another government agency, The Consumer Financial Protection Agency, to be in charge of regulating the fine print on consumer products like credit cards and mortgages, much in the same way as other government agencies regulate things like the safety of drugs, food and toys. The new entity will determine what fees, penalties and interest rates are fair. The President said “Americans are demanding” this action.

And then there is the new EPA limits on carbon and the scheme to regulate and sell carbon credits. You can make your own judgment on this one but needless to say most businesses in the US say this won’t work as proposed and are speaking up against the program.
For the first time since World War II, the global economy is expected to shrink this year with consequences for large and small nations alike. Trillions of dollars in lost business, hunger and homelessness will accompany increased crime and other unrest around the world. Not a pretty picture but it is good for those countries and economies than keep people safe.

RETAIL REPORT

While we usually don’t think of auto dealers as “retail”, their sales certainly show up in the statistics. And what went on with the auto companies and their dealerships this quarter is worth mentioning. First, both Chrysler and General Motors filed for bankruptcy protection. Then GM sold its Saturn brand to a Penske entity and its Hummer brand to a Chinese company. As a part of the restructuring, both brands are going to close many dealerships across the nation. This is going to further add to the job losses but it a part of being more efficient. According to news reports, about 15% of the auto dealerships sell more than 80% of the cars and trucks in our nation. Evidently many of these dealerships being considered for closing sell less than six units annually.

Other items worthy of note are:

• While many entertainment venues are struggling, evidently the theaters are thriving in this environment. Helped by new films including Fast and Furious, Star Trek and Hanna Montana, the nation’s 5,800 theaters have seen attendance jump 14 percent this year.
• US car sales were up 13% in May compared to April. Compared to May of 2008, they are down nearly 34%. But a little publicized fact is that we are scraping many more units than we are building so sometime in the future the sales have to increase.
• General Growth Properties, burdened with $27 billion in debt, was forced into Chapter 11 bankruptcy protection in April in an effort to protect its 200 plus malls. The nation’s second largest mall operator is only the first of a larger trend to come as almost $600 billion in commercial loans mature from 2009 – 2011. These loans must be restructured and the loan-to-value ratios of 85% - 95% will not fly in today’s market.
• In early June Mattel agreed to a $2.3 million civil penalty for the toys it imported that contained excessive levels of lead. On an industrial tour earlier this week I was shown a 150,000 square foot warehouse that is full of toys waiting on disposition.
• In an obvious embrace to President Obama, Wal-Mart gave its unqualified support of the President’s push for far-reaching changes to the nation’s healthcare system. The nation’s largest employer announced its position in a letter to congressional and administration officials that it supports requiring all big firms to offer health plans to its employees.
• The nation’s largest restaurants have embarked on an effort to get their customers back into the stores with deep discount promotions. Chili’s new “10 under $7.00” program is achieving its desired goals but the franchises in many of the big chains are saying that the big restaurant groups are causing them to lose money as the promotions do not even pay the costs of the food, more less the operations of the actual units.

TEXAS & DFW REGION

It is official – Texas is not going to escape the downturn. But things in the Lone Star state are not as bad as elsewhere in the nation. For instance:

• Although almost 8% of Texans are behind on their mortgages, that is half of the national average. And compared to Nevada at 11.75% and Mississippi at 11.7%, we are in pretty good shape. Plus many of those in Texas that are behind didn’t really need to be buying homes anyway; they could not afford them in the first place.
• Commercial values in the state continued their downward slide according to Moody’s and Real Estate Analytics. A report completed in June states that
• Construction job losses have really hit the state hard. During the 12 months ending in April, it is estimated that Texas lost about 62,000 construction jobs, a 9.2% decline. But again, compared to California at almost 150,000 jobs, an 18.4% decline and Florida with 105,000 jobs lost, 19.8%, we are quite fortunate here.

Look at the home price changes in the 10 largest metro areas in the country:

FORT WORTH

• Fort Worth was recognized by the Census Bureau as one of the fastest growing cities in the US and it is the only large city in the top 25. According to the Bureau, we added 168,379 residents since the 2000 Census. But with 300 miles in the existing city limits, and another 300 miles available for expansion, the population spurt was inevitable. It is estimated that as of July 1, 2008, Fort Worth had a population of 703,073.
• Local Market Monitor, a real estate forecasting organization, has ranked Fort Worth-Arlington as one of the top 10 best predicted markets in its Home Price forecast.

ALLIANCE AREA

• Some areas of the country just keep on working. Alliance is one of those areas. As far as I can tell, both of the two largest mixed use developments in the entire Metroplex are in this immediate area – essentially across the street from each other. Fine Line Diversified Development, the real estate development arm of Ed Bass, has begun planning for Champions Circle, a 279 acre, $300 million town center project for shops, offices and homes. The project is across from Texas Motor Speedway on the SWC of HY 114 and I35W.
• And LNR Commercial Property Group, a company from Newport Beach, CA, is putting the finishing touches on infrastructure plans at Presidio Junction on the NEC of the same intersection. Its plan will contain more than 1 million square feet of retail and restaurants, 1,300 apartment units and 750,000 square feet of fitness, hotel and office space.

NORTHWEST FORT WORTH/LAKE WORTH

• Texas Health Resources closed on the 47 acres at our Landmark Quebec project. According to their real estate rep, they are in the planning stages of the first phase of the hospital.
• Lockheed is no longer pushing its F-22 to congress. Defense Secretary Robert Gates has made it clear that he is going to back his generals and will not support this weapon system any longer. But this should mean a boost for the F-35.
• Logan’s Roadhouse is well underway on its construction at our Landmark Lakes project. The restaurant should be open in the fall.
• 24 Hour Fitness opened strong at Landmark Lakes and has maintained its momentum. The club is looking good and the manager says that they are continuing to break records in membership, visits and sales of supplements, etc.

MANSFIELD & ARLINGTON

• The local project commonly known as “Jerry’s World”, the new $1.15 billion Dallas Cowboy’s stadium, built with the help of $325 million of taxpayer funds, officially opened last month in Arlington. George Strait was the opening act at the new stadium. You can see the stadium from any building in the area that is in excess of 10 stories. It looks like a giant spaceship.
• Colleyville based Realty Capital Partners bought an 8.5 acre tract in Mansfield where it plans a luxury apartment community and shops. The rents will average about $1.15 per square foot for the apartments.

SUMMARY

In less than six months after taking office, our new administration has committed to spend trillions of dollars on what it calls the previous administration’s excesses. This is very alarming but I just don’t see it as fatal to our national economy. However we do need to be ready for some material changes in our economy in general and our business in particular. For instance, US consumers have dramatically cut their debt levels. In the first quarter of 2006 the consumer debt went up $1.37 trillion; in the first quarter of this year, the number was a negative $151.8 billion.

The growing government budget deficit is likely to decrease growth. The federal government surplus was a positive $236 billion in 2000 and it is a deficit of $1.84 trillion now.

The baby boomers have seen two bear markets in the last seven years. Their retirement plans are suffering badly. The S&P index was 1,520 on September 1, 2000 and stood at 666 on March 9 of this year.

Now for the real test. The Boomers were a main catalyst of the spending during the boom. They have gone back to work in many instances. If fact, in May the Boomers gained 224,000 jobs while the country as a whole lost 661,000 jobs. According to David Rosenberg, chief economist for Gluskin Sheff, this is good news because the past has proven that if the older Baby Boomers have money, they will spend it. And generally speaking, they are pretty good judges of where the money can be spent to make the economy grow.

So, where are we now? I think there will be some deep discount deals available for those with money that can take advantage of the times over the next 18-36 months. I think retail is going to stay slow over the next 12 months as companies and industries consolidate. Projects associated with medical, student housing and other educational uses are going to continue to be in demand but financing is going to be very hard to come by. Only the best locations will see any development and that will include higher educated and well paid communities. Now, more than in past years, we have to be careful where we place our investment dollars.