NATIONAL AND INTERNATIONAL

The subprime “crisis” remains the hot economic topic at year end. But are we missing the real risk to the US and world economies? What about the falling US dollar, the fact that foreign countries seem to be taking a second look at their investments in the US dollar (bonds) and what the subprime mess has done to other economies? Given the fact that we still do not know the extent of the subprime mess, it may be a while until the real cost of the over-investment in the alphabet soup of tranche vehicles surfaces. That being said, when compared to the overall economies of each of the countries, it is not that bad. The press, needing something negative to write about, has built the event up like it is a world economic meltdown.

The consumer confidence must have taken a break from its precipitous drop last month. If the CCI flattens out or continues up, no matter how slight, it might spell the last of the really rough part of the expected drop. If the CCI turns downward again next month it could signal some more rough times in the US and world economies.

Chart taken from the Conference Board Website

• The biggest political news this quarter was the assassination of Benazir Bhutto in Pakistan in late December. The US market reacted by dropping 192 points (Dow) but was slightly up right after that. Oil went up on the news.
  
• As the US dollar loses ground, other currencies go up. The Canadian loonie is at a 30-year high against the dollar and the Canadian investors are flocking southward to take advantage of our weakness. Florida, Nevada and many other places that are warm in the winter are seeing our northern brothers come to look at our markets. Many of the investors are purchasing condos.
  
• Another troubling fact is that the US, where the Internet was created, is falling behind other countries in access. In a report by the OECD, only South Korea, Canada and Sweden had more broadband subscribers per 100 residents than the US in 2001. In 2006 the US, with 19.6 subscribers per 100 residents, fell to 15th place behind Denmark (31.9), Netherlands (31.8) and others. That being said, Congress is working on ways to get high speed access to our less populated areas. I don’t know if having Congress get into it gives me hope or not!
  
• Oil prices at the end of 2007 are up over 57% from the start of the year. The higher energy prices will certainly be felt as the cost goes through the economies of the world.
  

RESIDENTIAL REAL ESTATE

• Nationally foreclosures in December were up as compared to last year but down slightly from over the last few months. The December postings will actually be auctioned on New Years Day, January 1, the first Tuesday in January, in Texas. It will be interesting to see how the auctions go around the state.
  
• Sales of existing single family homes were up slightly in November. But the inventory still represents over a 10 month supply.
  
• Homebuilders remain pessimistic on the near future as sentiment remains at a record low for the third consecutive month. The reading was 19 in December, the lowest since May 2006. Any reading of 50 or more is positive and the index has been negative since May.
  
• In Stockton, CA, Cesar Dias, a local real estate broker, has undertaken an innovative method of marketing foreclosed homes – bus tours. He advertises the tours and then loads two 18 passenger buses with prospects and tours neighborhoods. The neighbors were hostile at first but now some of them are actually friendly as they want to see the empty homes occupied again.
  
• The real risk in home ownership in America is not just the huge foreclosure rates. The biggest risk is the lack of equity in homes all over the country. Homeownership is a misnomer when there is no equity.
  
• Other than a few markets like Seattle, Portland, the Texas markets and Charlotte, most of the country is experiencing weak to bad residential markets.
  

COMMERCIAL REAL ESTATE

The commercial market continues to be the shining light in real estate. So far, the commercial sector has held up well. But the credit crunch is starting to be felt in higher spreads throughout the commercial market as well. Several major players have announced plans for the 2008:

• Hilton and Blackstone closed their $26 billion merger and Hilton is now privately owned.
  
• Walgreens anticipates opening 550 new stores in fiscal 2008.
  
• Costco reported higher sales and profits for fiscal 2008 and stated that the company would open another 30 stores this year, the same number opened in fiscal 2007.
  
• Jos A. Banks, in a move away from the big malls into the lifestyle centers, stated that they will open 50 stores this year. The stores will be smaller and are expected to establish better relationships with its customers.
  
• PF Chang’s will reduce the number of Pei Wei Diners that it will open next year. Evidently the economic environment has hurt them.

TEXAS & DFW REGION

• Site Selection Magazine has ranked Texas as third in its annual comparison of each state’s business climate. North Carolina remains on top but Georgia bests Texas which slipped to third.
  
• Texas continued to add jobs in November with 12,300 net new jobs. The rate slipped somewhat from October.
  
• Texas continues to be the best goods exporter in the US. The US Census Bureau stated that Texas exported just under $139 billion from January – October. California came in second at about $105 billion.

DALLAS AREA

• The DFW area home market has looked better than it really is in my opinion. Although home prices just officially tipped into negative territory in December the statistic has been skewed by the fact that the upper priced homes have been holding up so well.
  
• North Texas saw 3,672 properties posted for foreclosure in December which resulted in a 30% increase in home postings as compared to January 2007. The general thought is that we are close to the top but that the lower end home market will stay unhealthy for a while. Home prices dropped .01 percent.
  
• The Dallas Fed expects the region to slow in 2008 but to continue to add jobs at a rate of over 2 percent. The region is expected to be one of the best in the nation according to the Fed.
  
• M/PF YieldStar, the regional apartment research group, expects our multi-family market to continue to be very healthy for the foreseeable future. Right now, DFW and Houston are the top job producing markets in the country and with the slowdown in single family financing, the apartment market is strong.
  
• DFW continues to enjoy one of the strongest industrial markets in the country. But with 17.8 million sq ft of new space under construction, there are worries about upcoming vacancies. So far the absorption remains strong.
  

FORT WORTH/TARRANT COUNTY

• Home foreclosure in Tarrant County was 1,210 posted for the January auctions, 15% more than a year ago but a 7.1% drop from last month. The thought is that the worst is over for Tarrant County.
  
• There were over 100,000 Barnett Shale leases filed of record in Tarrant County in 2007. It is estimated that production was over 2 trillion feet per day in the first eight months of 2007. That would equal $12 million of economic value (sales price) per day at $6.00 per thousand.
  
• The Residences at One Montgomery Plaza is currently 65% sold and continues to make headway. The units are selling from the mid-$200,000s to $1.6 million.
  

FORT WORTH CBD

• Robert Rowling, the owner of the Omni Hotel that is under construction across the street from the newly upgraded Fort Worth Convention Center, has made it clear that anyone staying at the Omni should expect to “drop some dollars” to visit the hotel. And he has taken the penthouse of the residential units himself. The 607-room hotel should open at the end of 2008.
  
• Over 25% of the Omni Hotel’s condos have been sold at prices of about $500 per square foot.
  
• Fort Worth was named the strongest Central Business District in the US by Moody’s Investors Service for the second year in a row.
  
• The office market in the CBD is experiencing unprecedented new construction. There is over 1 million square feet of new office being built and more is on the way. The vacancy rate remains about 6%.
  

ALLIANCE AREA

• The Alliance/Interstate 35 market continues to be very strong. Nokia, the Finnish cell phone manufacturer, closed its 61-acre campus and sold it back to Hillwood (Perot). But with the park nearly 100% leased the developer is not worried.
  
• In another transaction in the same area, Hillwood inked a 204,000 s/f office lease with Daimler after its split from Chrysler. Daimler will move from other Hillwood properties but Hillwood has already back filled most of the space.
  
• Panattoni, the California developer, will develop a 92-acre retail center at HY 114 and I35. It will be anchored by Hooter’s and is adjacent to 76 acres being developed for industrial by the same company.
  
• Miami based LNR Property has acquired a 168-acre tract at I35W and HY 287 for a regional shopping center. It is across from Perot’s Heritage Center.
  

NORTHWEST FORT WORTH/LAKE WORTH

• Principal Real Estate has acquired the 187,472 s/f Lake Worth Market Place anchored by Kohl’s from Canyon Partners of Fort Worth.
  
• The US plans to sell 24 F-16 fighters to Morocco. The planes, manufactured by Lockheed in Fort Worth, are expected to cost $2.4 billion and will keep the F-16 portion of the Lockheed plant on Loop 820 in business past 2011.
  
• The Fort Worth City Council has approved $117 million for dredging of Lake Worth and will improve and expand its parks. The funds will come from Barnett Shale royalties.
  

MANSFIELD/ARLINGTON

• South Arlington continues to count the days till the new Dallas Cowboys stadium opens. At a cost of $1 million per day, it is one of the most expensive construction projects in DFW history.
  
• Two hotels have joined the Glorypark lineup. Westin and aloft hotel (yes, this really is the name of the new Starwood concept) will both build in the park anchored by the Cowboys Stadium and the Ballpark in Arlington, home of the Texas Rangers.
  
• The Arlington Highlands development has signed Dave & Busters and Splitsville, a high end bowling alley and restaurant concept from Florida.
  
• Mansfield Pointe has added Circuit City and Bed, Bath & Beyond to the development across HY 287 from our Mansfield Highlands project.
  
• Texas Roadhouse opened at the Mansfield Commons to a great crowd in December.
  
• We opened our Buffalo Wild Wings restaurant in early December. It is rumored to be one of the best openings in the DFW market for the upscale sports bar.
  

SOUTHLAKE, KELLER, NE TARRANT AREA

• Great Wolf Lodge, the 402-cabin water park opened December 21. The upscale entertainment hotel has already begun plans for a $30 million expansion to add 203 rooms and 17,000 s/f of convention space.
  
• Gerald Hines has purchased the largest remaining tract in Southlake from Newland Communities to develop the 281-acre parcel to include a performing arts center, shops, offices and single family homes.
  
• The first phase of Arthouse in Keller, a $30 million development of single family condos above retail and studios, is open. Southern Land, the developer, reports good activity, especially from residents wanting to leave their larger homes in the immediate area.
  

LAS COLINAS

• Although office leasing slowed in 2007, Las Colinas showed a 349,000 s/f gain.
  
• And recently announced, but not in the gain referenced to above, is the announcement of Research in Motion, the maker of BlackBerry, for its new 110,000 s/f US corporate headquarters at Riverside Commons.
  
• Fort Worth based Woodmont is developing a 65-acre shopping center at State Highway 161 and Las Colinas Blvd. It will include 1 million s/f of retail, 200,000 s/f of office and 250 residential units.
  

SUMMARY

So where do we go from here? I have been expecting a slowdown for several quarters and actually wrote about the subprime risk last year. It just took longer to get bad than I thought it would. But that just goes to show the resilience of the US economy.

It is said that there are some businesses that are recession proof. They include prostitution (I will stay away from that one), booze (I refuse to ever run a bar – too much like a job), gambling (too much organized crime that we can’t compete with. Besides, I am not moving to Vegas). So what do we do? I think we have to stick to doing what we do best but be very cautious about projections of time. It is usually the additional time to achieve reasonable goals that kills good real estate deals. It may take more time for us to get the job done on some of our projects. But as long as we are working in the “fairway” of good growth and in cities that appreciate what we do, I think we should weather the storm on all of our deals.

That being said, if there was ever a time to lock in long term permanent financing, it is probably now. Likewise, it might not be too bad to take some long term capital gains now before the US congress kills that golden goose.

HAPPY NEW YEAR FROM THOSE OF US AT WILSON & STONAKER, LLC!