Homes vs. Offices

I mentioned the duality of this era the other day, and it carries right into today’s discussion —

Housi_20070704On the one hand, Pending Home Sales Index dropped 3.5% in May to a 6-year low:

"Pending sales of existing homes dropped to their lowest level in almost
six years, a real estate trade group said Tuesday, demonstrating the
persistence of the housing slump.

The 3.5 percent decline in May,
compared with the previous month, follows a drop of 3.4 percent in
April and a 4.5 percent dip in March. It leaves the National
Association of Realtors’ index at its lowest point since September 2001. . .

The association’s index of pending home sales fell to 97.7 in May,
from a downwardly revised figure of 101.2 in April. The May figure is
13.3 percent lower than the May 2006 reading of 112.7. The index stood at 89.8 in September 2001. An index reading of 100 is equal to the average level of contract activity in 2001."

It is not unrelated that inventory levels of one family homes for sale continues to rise :

"In another sign of weakness for the housing market, the National
Association of Realtors reported this week that its index of pending
home sales in May declined 3.5% from a month earlier to stand at 97.7.
The index, which is down 13% from a year earlier, equates the 2001
level of activity to 100. The group considers a sale pending when a
contract has been signed but the transaction hasn’t been completed."

So much for Hank Paulson’s bottom.

Yet on the opposite side of town, Office rents are "Soaring" and space remains tight:

"Office rents are skyrocketing across the nation,
driving up costs for businesses large and small, thanks to a dearth of
space in some major markets and a new breed of deep-pocketed landlords
who can afford to hold out for premium tenants.

Nationwide, effective rents on office properties —
the amount tenants pay after concessions — jumped an average of 3.1%
during this year’s second quarter, up from gains of 2.8% in the first
quarter and 2.1% in the year-earlier period, according to a report
scheduled for release today by real-estate research firm Reis Inc.

That was the sharpest quarterly increase since the
third quarter of 2000, before the combined effects of the
technology-stock bust and the Sept. 11, 2001, terrorist attacks caused
office vacancies to rise and rental rates to fall."

I can tell you from personal experience in Manhattan that mid-twon space is hard to come by (downtown is no problem — cheaper, more choices, more negotiable). 

The solution to this problem is obvious: We need to get these two groups together! All the flippers and speculators need to come together to form suburban office parks of unsold homes, and offer them to businesses to alleviate the office space crunch . . .

Problem solved!


Number of Unsold Homes Increases   
WSJ, July 5, 2007; Page B8

Pending Home Sales Near a 6-Year Low
U.S. Pending Home Sales Index Drops 3.5 Percent in May to a Near 6-Year Low
Christopher S. Rugaber
AP, Tuesday July 3, 11:39 am ET

Soaring Rents Pinch Businesses Across the U.S.
Second-Quarter Jump Is Sharpest Since 2000;
WSJ, July 5, 2007; Page A1

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What's been said:

Discussions found on the web:
  1. Winston Munn commented on Jul 5

    The other side of the pond seems to have a completely different take on how to handle asset bubbles:

    “July 5 (Bloomberg) — Bank of England policy makers raised interest rates for the fifth time since August and said they’re concerned inflation will stay above target, adding to investor speculation that at least one more increase is likely this year.”

    I would think this would also pressure U.S. bond prices, as well.

  2. michael schumacher commented on Jul 5

    Did’nt Paulsen say that less than a month ago???

    Yes he did….Trying to create a self-fulfilling prophecy.

    He should just STFU since he has no business speaking about it. Great we need another Cheney telling us things that are so wide of the mark.

    Why is it that we (along with Japan) are the only ones who think inflation is in control and we should’nt raise rates??

    Another bottom call. Is Paulsen getting paid by the NAR now??


  3. jmf commented on Jul 5

    Moin from Germany,

    some news from bubble centre London

    Citi’s Canary Wharf headquarters sold for $2 billion

    The investors noted that the yield is in the range of 4.5%, which is significantly below the market average for Canary Wharf and the City of London. They anticipate the yield will increase “significantly” as the rent converges with the market average rent rate.

    Citi will still lease its 1.2 million-square-foot offices through 2026, paying 46.5 million pounds a year.

    RBS also has the London headquarters of Credit Suisse, also at Canary Wharf at 5 Canada Square, on the block, according to published reports

  4. jmf commented on Jul 5

    Moin again,

    this is from the latest New York block deal Blackstone/EOP to Macklowes, who teamed with Fortress Investment

    The $7.25 billion price tag for the eight buildings was based on a rate of return in the first year of about 3 percent. But when other costs like leasing commissions and repairs are deducted “it probably means that the net cash flow is pretty close to zero,” ……

    To make the buildings profitable, real estate professionals say, annual rents, which currently average $55 to $59 a square foot, will have to rise to $100 a square foot or more — a daunting, but not insurmountable, goal. Last year, 41 tenants in Manhattan agreed to pay that much or more

    so they better increase the rent for years to come over 7-8% p.a……. :-)

  5. M1EK commented on Jul 5

    This is where the suburban-oriented zoning codes really hurt our flexibility (you simply can’t convert residential space into office space in 99.9999% of cases). But thankfully, our major competitors are largely even dumber in this regard.

  6. S commented on Jul 5

    HLT going for 13.5x ’08 EBITDA. Lenders are insane in the membrane.

  7. DD commented on Jul 5

    They paid this much not because they raised all this cash in an IPO but because the family promised Paris to Mr. Schwartzman in some weird ol’ fashioned shot gun style wedding/porn brouhaha.

  8. Peter commented on Jul 5

    Pending Home Sales Decline

    The National Association of Realtors’ index for pending sales of existing homes decreased at a seasonally adjusted annual rate of 3.5% to 97.7 from April’s 101.2, the industry group said Tuesday.

    Its index, based on signed contracts for used homes, was 13.3% lower than the level of 112.7 in May 2006.

    NAR economist Lawrence Yun said tighter lending standards and wary buyers continue to depress housing activity. “Some transactions are being postponed from mortgage-market disruptions,” Mr. Yun said in a statement. “But better supervised lending will put housing in a fundamentally healthier state over the long term,” he added.

    Looking forward, Mr. Yun said demand may be building amid the sales lull. “Mortgage purchase applications are trending up, with some of the rise due to buyers reapplying for alternatives to subprime financing,” Mr. Yun said. “Nonetheless, home sales should stay close to present levels in the months ahead given an accumulating pent-up demand.”

    By region, May’s reading showed a 3.8% increase in the Northeast from April — but a 9.6% decrease since May 2006. The index dropped 8.9% in the Midwest in May and was down 11.7% in the 12-month span. The South saw a 7.6% drop in May and a 15.4% decline in the past year. The index for the West rose by 5.6% in May, but was down 13.7% since May 2006.

    The NAR’s pending home sales index was designed to divine the way the housing market is headed. It is based on pending sales of existing homes, including single-family homes and condominiums. A home sale is pending when the contract has been signed but the transaction hasn’t closed. Pending sales typically close within one or two months of signing.

  9. cm commented on Jul 5

    Barry, it’s understood you remark is tongue-in-cheek, but who needs office space somewhere in a boondock bedroom community? With commercial space there is also, and a perhaps stronger, concept of “location”. You have to position yourself so that you have access to your business associates/partners and business infrastructure, and vice versa. It’s more than a matter of putting a desk and a computer inside a room.

  10. DD commented on Jul 5

    The amounts that people are paying for these buildings is astronomical…they are banking completely on asset price appreciation. If this isn’t hyperinflation I don’t know what is…people would rather buy buildings at ridiculous prices then keep their cash earning the same if not more in interest…the value of money is nothing…the value of buildings on the other hand something that cannot simply be created by the government or greedy bankers continues to rise at extremes rates…

  11. Stuart commented on Jul 5

    you know, when investors seek blood for the losses, I am just waiting for investment/hedge fund managers to deflect liability and direct blame towards public officials, whether from the NAR , the Treasury or the Fed itself. They will claim they themselves were surprised at the downturn in the housing market because the public stewards were saying there is little to worry about, that the downturn is contained, turning the corner, or has bottomed etc. In fact, I’m surprised homeowners squeezed by ARM resets haven’t gone after these public officials claiming they were lured or enticed by their positive portrayal and what turned out to be their propogation of a false sense of security. Even more direct is Greenspan a few years back suggested that adjustable rate mortgages were wonderful products and encouraged people to take advantage of them. Those that took his advice were clearly harmed. That alone I would think would have somebody trying to go after the Fed (good luck btw) to seek damages. In the end all these false assertions I would think will come back to bite public officials that, whether intentional or not, lured the public and inv managers, whether naive or not, into false understandings about the potential risk in the housing market. As a result, they were harmed and many will likely claim they were just following the advice of their leaders. Afterall, they’re the one’s who should know, right? LOL

  12. KnotRP commented on Jul 5

    There is a big difference between *having* higher commercial rents, and planning to increase commercial rents at some point in the future. Commercial tenants may have a hard time moving, but if they have no pricing power this will tap their profitability (buh-bye stock price) and those that find themselves unprofitable will go bankrupt before rent is paid. The buyers seem to think the sellers were incompetent — incapable of maximum rent extraction — which is an unlikely explanation, while it’s quite likely that the sellers have done all they can and decided T-Bills are more attractive (particularly instead of holding commercial real estate through the next recession).

    All this article says is that we haven’t run out of greater commercial real estate fools, but we already knew this would lag running out of greater residential real estate fools.

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