NATIONAL AND INTERNATIONAL

I love it when our government states the obvious – we have officially been in a recession since last summer. These guys are great. Maybe they should be required to get out of their government and academic comfort zones and hit the streets once in a while. I think that business, both in the US and Canada for certain, have known something was going on for quite a while.

The Dow started the 3rd quarter at 11,215. By the end of the 3rd quarter the Dow was 10,483, quite a drop from the high last year of 14,044. By mid-November, the Dow had dropped to 7,552. It closed on December 31 at above 8,600, about 1,000 points from the low for 2008. Is this the end? Will we test the 7,500 level again or go even lower? Who knows – not me?

Over the last three months, the United States Congress and the White House have been spending money like there is no tomorrow. It is almost like it belonged to them! The latest was the band aid for the Big Three automakers. And last week GMAC was included also. I am not certain what would happen if GM and Chrysler were allowed to fail but I really don’t think all the jobs would be lost. Certainly some jobs are going by the wayside anyway when the government forces the automakers to streamline their operations. But that is just one industry. Heck, we have some vacant real estate. Don’t we need a TARP bailout also?

The Consumer Confidence Index has dropped to an all time low according to the University of Michigan. After recording a modest increase in November, the index dropped to 38 from just under 48 in November. Is this the final plunge? With unemployment increasing, I doubt it. But this is one indicator to watch.

Chart taken from University of Michigan Website

Other significant news to be aware of is:

• The manufacturing index hit 36.2 in early December, a 26-year low.
• Job cuts jumped to a 6-year high in December and surpassed the 1 million mark for the fifth time in the past decade. The financial industry has been hit especially hard losing over 367,000 jobs in the last two years alone.
• The Architecture Billing Index, an indicator of construction activity in the future, fell to its lowest point since the survey was started in 1995. This is a direct indicator of the amount of new commercial construction that will be started within the next couple of years. While this is initially seen as an unfavorable indicator, it can also be a good one for those property owners that have existing product in well located centers, etc.
• The November Consumer Price Index fell 1.7 percent lower than the month before. A lot of this reflected lower gasoline prices.
• New home starts plunged 20% in November.
• Warren Buffet stated in October that he is a buyer of equities. The world’s most famous investor has committed at least $28 billion since January 2008.
• Along those same lines, the Federal Reserve data compiled by Leuthold Group and Bloomberg state that there was over $8.85 trillion dollars, an amount equal to 74% of all of the value of all of the US companies listed on the stock exchanges, sitting on the sidelines waiting to be deployed. This is the highest ratio of ready cash since 1990. What happens when these funds are put back to work? At some point this will be done and the stock market will recover.

From over $147.00 per barrel this summer to nearly $35.00 per barrel this month, crude oil has been to the top and back again. Personally I think the real price should be in the $50.00 - $70.00 range. The lower price, and its corresponding drop at the pump for gasoline, has given the consumer a huge cut in expenses.

Chart taken from WTRG Economics Website

OPEC’s production cuts have had almost no effect on the world price of oil. But the International Energy Agency is telling us not to get complacent. The Houston based group states that it is essential for the world’s energy companies to continue to invest in new projects to keep us from having a crisis in the next few years. Even though the US consumer seems to be changing his driving habits, the continued growth in energy consumed, especially in the emerging countries, will cause us to need substantial new supplies of fossil fuels along with alternate energy sources.

RETAIL REPORT

This was the weakest Christmas season in years, maybe ever once the final numbers are in. With consumers worried about their jobs and losing their homes, shopping was the last thing on their minds this holiday season. Although the crowds were not that bad, the traffic was more lookers than buyers. Retailers started their Black Friday sales (the day after Thanksgiving when it is said that many retail firms actually get into the black – make money - for the first time each year) and continued the sales through December. Several big name firms could not wait until after Christmas to declare bankruptcy: Circuit City, Linens ’n Things, KB Toys, Steve & Barry’s just to name a few. And the list is certain to grow in January.

• AlixPartners LLP, a turnaround consulting firm, says that 25.8% of the 182 major retailers it tracks are facing major financial distress or will face a significant of filing for bankruptcy this year or in 2010. That compares with 4% - 7% over the last two years. They think that 160,000 stores will have closed in 2008 and 200,000 more could close in 2009.
• General Growth, the second largest mall owner in the US, was dropped off the S&P 500 because its price fell too low. The company may still have to seek bankruptcy protection if it cannot find a way to restructure $958 million of its debt.
• According to a report in the Wall Street Journal, SpendingPulse and MasterCard Advisors stated that the change in retail sales from November 1 through December 24 showed just how hard this economy has hit retail. But with on-line sales only down 2% and electronics/appliances dropping 27%, the big news was that the luxury classification was down the most at 35%. Evidently the upper income class has decided it didn’t need the high dollar clothes, etc.
• Brinker International sold the majority of Romano’s Macaroni Grill to Mac Acquisition from San Francisco for $88 million this quarter. Brinker will continue to operate the chain.
• Ruby Tuesday announced that it is closing 70 locations.
• Darden (Olive Garden, LongHorn Steakhouse, Red Lobster) announced that it is opening 70 new locations.
• Fitness chains continue to grow across the US. Currently there are 29,632 health clubs in the US according to the American Sports Data and InfoUSA. With the baby boomers just getting into the health and fitness mode, these clubs may do well. And the clubs are more than just a place to out. They also provide an additional place for meeting and networking for many users.

RESIDENTIAL REAL ESTATE

• Residential real estate continues to take it on the chin. But the good news is that the refinance market is strong with 30 year rates just above 5% and probably going lower.
• Needless to say, builder confidence continues to seek a floor. The NAHB/Wells Fargo Housing Market index slumped five points to 9 in November, the lowest since the measure was started in 1985. Readings below 50 mean more builders view the market conditions as poor than favorable.
• The October Case-Shiller Home Price Indices, reported on December 30, showed US home prices continue to be in a broad decline versus October 2007. Phoenix was the worst at 32.7% with Las Vegas right behind at 31.7%. DFW has the least decline at 3% with Charlotte at 4.4%.
• With so many foreclosures, the rental demand has been surging, especially in the cities still creating jobs like DFW.

COMMERCIAL REAL ESTATE

Along with the bleak retail season, many are predicting that commercial foreclosures will be the next economic crisis. There is about $20 billion of commercial debt due in 2009. And 2010 and 2011 have even larger amounts maturing. Unless investors, mainly pension funds, insurance companies and banks, free up some serious funds soon, the commercial foreclosures will jump even higher.

TEXAS & DFW REGION

• Texas added the most people in the past year. From July 2007 to July 2008, Texas added 483,542 new residents. It also had the third highest population growth in percentage at two percent, behind Arizona and Utah.
• Commercial sales transactions in our area declined this quarter by about 22%. This was more than the national average.
• Commercial foreclosures are up this quarter. So far, there have been just under 2,000 commercial foreclosures in the DFW Metroplex this year. This is far less than in the 1980s and the properties are generally Class C and lower quality.
• CKE Restaurants has announced that it plans to open 160 new Carl’s Jr. stores in DFW in the immediate future.
• Duncan Donuts plans to open 150 stores in our area by 2015.
• The DFW warehouse numbers were slightly weaker than last year but the development is expected to fall also.
• Office leasing in DFW is termed “stable” by Cushman & Wakefield’s executive director Mike Wyatt.

FORT WORTH CBD

Fort Worth continues to be the city on a roll. The CBD added new buildings last year, the occupancy went up to 95% and the rents increased also. The multi-family occupancy in downtown stands at over 96% and retail is holding its own at 98.9% occupied. Only hospitality went down but not by a significant amount. ALLIANCE AREA Alliance became the top US foreign trade zone in 2008. More than $4 billion in foreign goods passed through the general purpose foreign trade zone at Alliance Global Logistics Hub. BNSF handles over 1 million containers annually at the hub.

NORTHWEST FORT WORTH/LAKE WORTH

• Our Landmark Quebec project is still getting press with the newspapers wanting to know what is going to happen at the project and when. Almost the entire infrastructure is in place and the dirt has been seeded. We are still working on getting approval for Texas Health Resources from the Texas Department of Health.
• Logan’s closed on the tract on the Landmark Lakes project and the work is resumed for the tenant improvements for 24 Hour Fitness.

MANSFIELD/ARLINGTON

The big deal in the Mansfield Arlington area remains the Dallas Cowboys stadium. The facility is huge and dominates the skyline in the area. It is too bad that the Cowboys could not have been in the playoffs this year. Maybe the new stadium will give them a little extra incentive next year.

SUMMARY

OK, we are officially in a recession. But as I said last quarter, by the time we know we are in one, we will probably be coming out. A lot will happen this quarter, most significantly, Barak Obama will take over as the nation’s president. What Congress does to boost the financial markets is going to be huge, one way or the other. By the end of the first quarter of 2009 we should have a much clearer picture of what the year will look like. Until then, I think we just have to keep on doing what we do best, attempt to create value in our real estate holdings.

HAPPY NEW YEAR!