Collapse of the U.S. Economy

Silicon Valley's Worst Office Glut in 5 Years Means Commercial Real-Estate Bloodbath

January 5, 2010

Bloomberg - Silicon Valley is beset by the biggest office property glut since the dot-com bust, leaving the U.S. technology hub with empty high-rises and office parks that make it impossible for landlords to sustain average rents.

More than 43 million square feet (4 million square meters) -- the equivalent of 15 Empire State Buildings -- stood vacant at the end of the third quarter, the most in almost five years, according to CB Richard Ellis Group Inc. San Jose, Sunnyvale and Palo Alto have 11 empty office buildings with about 3 million square feet of the best quality space.

“There is a bubble bursting in much the same way as the residential market burst,” said Jon Haveman, principal at Beacon Economics, a consulting firm in San Rafael, California. “None of those towers will fill up anytime soon.”

Unemployment in the San Jose-Sunnyvale-Santa Clara metro area that includes Silicon Valley was 11.8 percent in November, down from the August record of 12.1 percent, according to California’s Employment Development Department. Applied Materials Inc. and Sun Microsystems Inc. in Santa Clara and Adobe Systems Inc. in San Jose announced more than 5,000 job cuts since October amid falling sales of computer chips, software and equipment.

Commercial property foreclosures will at least double in 2010 and job growth won’t return for two years after that, held back by U.S. consumers who are saving more and “getting back in line with sustainable spending habits,” Haveman said.

Domino Effect

Bloated inventory and tight lending standards will curtail office construction in pockets around California for “the next several years,” said Jack Kyser, founding economist of the Kyser Center for Economic Research at the Los Angeles Economic Development Corp.

“That means there won’t be jobs for construction workers and hence no tax revenue from sales of construction materials,” Kyser said. “It is the ultimate domino effect.”

About 21 percent of Silicon Valley’s Class A office space is vacant, as is 20 percent of low-rise so-called flex or research and development space for offices or manufacturing, CB Richard Ellis said.

More than 4 million square feet of speculative office projects opened since 2007 as developers anticipated that companies would move from flex space into new towers, according to CB Richard Ellis. Empty Class A offices totaled 13 million square feet and vacant flex space was 30.5 million square feet as of Oct. 1, the Los Angeles-based broker said.

“Many of these assets have lost half their value,” said Dan Fasulo, managing director of New York-based research firm Real Capital Analytics Inc. “That’s a bloodbath.”

Start of Shakeout

Silicon Valley is in the “early innings” of a commercial property shakeout, said Erik Doyle, president of Cornish & Carey Commercial, a property brokerage in Santa Clara. The number of jobs in the information-technology sector that includes software and Web portals fell more in the prior year than in any industry except construction and mining, state data show.

Some technology companies are taking the opportunity to upgrade their space. Palo Alto-based Facebook Inc., the most popular social-networking Web site, signed a 135,000-square-foot office lease and a 265,000-square-foot flex lease. Solar-panel maker Solyndra Inc., which filed Dec. 18 for a $300 million initial public stock offering, broke ground on a new plant in Fremont in September.

Facebook will move into its new space in the second quarter, taking over four renovated buildings that used to house a medical-device company, said spokesman Larry Yu. About 600 employees, including engineers and Web designers, will occupy floors where lathes and centrifuges were once fabricated.

Tenant Pressure

Property owners are feeling pressure from tenants who want to lease for at least 10 percent less than published rates, said Michael Grado, a CB Richard Ellis broker. That makes this market worse than the dot-com bust after 2000 because back then defunct Internet companies continued paying rent despite a 60 percent vacancy rate, he said.

Asking rents averaged $34.56 a square foot for Class A space in the third quarter, 21 percent less than a year earlier. The rate for flex space was $14.16 a square foot, down 16 percent, according to CB Richard Ellis.

“You’ll see buildings turn over,” said Grado, whose listings include Riverpark Tower II, a 318,372-square-foot empty high-rise completed in July and owned by Foster City-based Legacy Partners Commercial Inc.

‘Cyclical Churn’

...Silicon Valley may need new industries to emerge from the property slump, according to Doug Henton, director of Collaborative Economics Inc. in Mountain View, California. Clean technology and social-networking are driving what little job growth exists amid a cyclical “churn” where layoffs at large companies lead to new jobs at start-ups, he said.

“We’re at the end of the bubble,” said Steve Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto. “It will take a long time to get the momentum going.”

Contracts Down: Is Housing Headed for Double-Dip?

January 5, 2010

AP - The number of people preparing to buy a home fell sharply in November, an unsettling new sign that the housing market may be headed for a "double-dip" downturn over the winter.

The figures Tuesday came after a similarly discouraging report on new home sales, illustrating how heavily the housing market depends right now on government help.

In October, buyers raced to get contracts signed in time to take advantage of a tax credit for first-time homeowners that was set to expire. It has since been extended into spring — and now prospective buyers are taking their time.

The National Association of Realtors said its seasonally adjusted index of sales contracts fell 16 percent from October to November, ending nine months of gains. Economists surveyed by Thomson Reuters had expected only a 2 percent drop.

"This was bound to happen at some point, although not by this much," wrote Jennifer Lee, senior economist with BMO Capital Markets. She added: "Gulp."

When the tax credit expires this spring and the government phases out programs to keep mortgage rates low, the housing market will have to stand on its own. Many economists doubt it can.

"We're just going to languish at the bottom," said Anna Piretti, senior economist at BNP Paribas.

The last housing downturn helped drag the nation into the worst recession in decades. The expected dip in home sales and prices this winter appears to pose less of a threat to the broader economy.

Orders to U.S. factories, for example, posted a big gain in November, the Commerce Department said Tuesday. So while the housing market remains vulnerable, makers of steel, computers and chemicals are mounting a surprisingly robust rebound.

"We expect housing to just limp along even as the rest of the economy is growing fairly strongly," said Nomura Securities economist Zach Pandl.

Stocks were mixed as the reports offered conflicting signals about the economy. The Dow industrials slipped 0.1 percent, while the broader Standard & Poor's 500 index rose 0.3 percent to its highest close since Oct. 1, 2008.

The tax credit is worth up to $8,000 for first-time homebuyers and was set to expire Nov. 30. Congress extended it through the end of April and broadened it to include a credit of up to $6,500 for buyers who relocate.

Typically, there's a lag of one to two months between when the contract is signed and when the sale closes. To meet the original deadline for the tax credit, buyers would have needed to submit a signed sales contract by the end of October at the latest.

The Realtor group said it expected homebuyers to start responding to the extension by early spring, suggesting that sales will pick up again but fall back later in the year, once the government support is gone.

In addition, the Federal Reserve is buying up $1.25 trillion in mortgage-backed securities to help keep interest rates at or near record lows. That program is scheduled to run out at the end of March, though a sudden jump in rates could force the Fed to extend it.

"We don't want to see mortgage rates rise yet," said Jerry Smith, associate broker with Re/Max Professional outside Denver. "And we certainly don't want to see unemployment get any worse than it is."

For November, new sales contracts were down 3 percent in the West, 15 percent in the South and 26 percent each in the Northeast and Midwest.

The housing market had been rebounding from the worst downturn in decades, helped by the federal intervention. Sales of existing homes surged in November to the highest level in nearly three years, but analysts expect a drop of 10 to 20 percent from November to December...

U.S. Growth Prospects Deemed Bleak in New Decade

January 3, 2010

Reuters - A dismal job market, a crippled real estate sector and hobbled banks will keep a lid on U.S. economic growth over the coming decade, some of the nation's leading economists said on Sunday.

Speaking at American Economic Association's mammoth yearly gathering, experts from a range of political leanings were in surprising agreement when it came to the chances for a robust and sustained expansion:

They are slim.

Many predicted U.S. gross domestic product would expand less than 2 percent per year over the next 10 years. That stands in sharp contrast to the immediate aftermath of other steep economic downturns, which have usually elicited a growth surge in their wake.

"It will be difficult to have a robust recovery while housing and commercial real estate are depressed," said Martin Feldstein, a Harvard University professor and former head of the National Bureau of Economic Research.

Housing was at the heart of the nation's worst recession since the 1930s, with median home values falling over 30 percent from their 2005 peaks, and even more sharply in heavily affected states like California and Nevada.

The decline has sapped a principal source of wealth for U.S. consumers, whose spending is the key driver of the country's growth pattern. The steep drop in home prices has also boosted their propensity to save.

"It's very hard to see what will replace it," said Joseph Stiglitz, Nobel laureate and professor of economics at Columbia University. "It's going to take a number of years."

One reason is that U.S. consumers remain heavily indebted. Consumer credit outstanding has fallen from its mid-2008 records, but still stands at some $2.5 trillion, or nearly one-fifth of total yearly spending in the U.S. economy.

Another is that many of the country's largest banks are still largely dependent on funding from the U.S. Federal Reserve and the implicit backing of the Treasury Department.

Kenneth Rogoff, also of Harvard, argued that if the U.S. government ever "credibly" pulled away from its backing of the financial system, then a renewed collapse would likely ensue.

He cited government programs giving large financial institutions access to zero-cost borrowing as artificially padding their bottom lines.

"There's something of an illusion of profitability," he said.

Manufacturing Posts Best Showing Since 2006; Construction Still Weak

January 4, 2010

Reuters - The U.S. manufacturing sector grew at its fastest pace in nearly four years in December, its fifth consecutive month of expansion, data showed on Monday, adding to hopes of economic improvement in 2010. That coincided with other data on Monday showing world factory activity expanded last month at its greatest clip in nearly four years.

But headwinds for the U.S. economy remain, as a separate report showed construction spending fell in November to a more than six-year low, depressed by a decline in homebuilding.

The focus, though, was on the Institute for Supply Management's national factory index, which rose to 55.9 in December from 53.6 in November. That was the highest reading since April 2006, when the index stood at 56.0. A result above 50 indicates expansion.

Stocks rallied, led by commodity and financial shares, as the ISM data pointed to a steady economic recovery. Major indexes closed up more than 1 percent, with the Nasdaq marking its highest close in 16 months.

"This is what we need in 2010 for a V-shaped recovery," said Alan Lancz, president of Alan B. Lancz & Associates in Toledo, Ohio.

After tumbling in late 2007 into its worst recession since the 1930s, the U.S. economy returned to growth in the third quarter of 2009, expanding at 2.2 percent annual rate.

While the economy still shed jobs through November, the pace of overall losses slowed. Economists polled by Reuters expect data later this week to show employers slashed 8,000 jobs last month after losing 11,000 in November. In early 2009, the economy was losing around half a million jobs per month, according to government data.

The ISM data hinted at continued improvement on this front, with its closely-watched employment index edging up to 52.0 from 50.8 and new orders rising to 65.6 from 60.3.

"Manufacturing will continue to be an area that provides support to the U.S. economy," said Kevin Flanagan, fixed-income strategist for global wealth management at Morgan Stanley. "We are looking to see if we can build on this recovery."

CONSTRUCTION SPENDING STILL WEAK

How much steam the economy builds in the coming months should help determine when the Federal Reserve raises borrowing costs from current record lows near zero, analysts said.

While the Fed said it plans to wind down most emergency lending by February, it has not deviated from a stated intention to hold rates low for "an extended period," which markets have interpreted to mean unchanged rates until at least the second half of 2010.

Torsten Slok, senior economist at Deutsche Bank in New York, said the strong manufacturing data "has to change the Fed-speak and Fed body language going forward."

But in a separate report, the U.S. Commerce Department said construction spending fell 0.6 percent in November. The decline to $900.1 billion, the lowest level since July 2003, was the seventh straight month of weakness in the industry.

Spending on private home building dropped 1.6 percent, the biggest decline since June, after rising 4.8 percent the prior month.

There was reason to be cautious about the manufacturing sector outlook as well despite Monday's data.

Cliff Waldman, an economist for the Manufacturers Alliance/MAPI, said high unemployment will keep consumers anxious and keep household and business demand subdued even as a global recovery takes hold.

"These issues suggest that while 2010 will be a recovery year for the U.S. factory sector, it will likely be muted and insufficient to soak up historic excess capacity," he said.