Home Runs:
Sales for the month of June hit an artificial 4 year high driven by the government tax credit. Congress has extended the deadline from the original June 30 until September 30 but still requiring a binding contract to have been executed by the end of April. Median price also rose slightly nationwide; here in Massachusetts we outstripped the national increase by more than double.
The local developers also seem to believe that the rise in sales and pricing may be just an anomaly as plans for local developments keep getting scaled back; e.g., the Fort Point development continues to be downsized. However, with the thinking that ‘if you build it they will come’ the state appears to be funding some of the infrastructure for the South Weymouth Naval Air Station (where I worked some 4 decades ago) with the thinking that this will help jump start the development. Maybe they should be thinking about where the demand will come from before we spend precious tax payer dollars – but maybe that is just me being skeptical.
However, the silver lining in these clouds is that the mortgage rates are at historic lows. So if you have a steady job, can afford to buy, or want to refinance, now is a great time to do so.
In sharp contrast to a rise in homeowner activity, Consumer Confidence fell to 51.0 in July, down from June which was down from May. The undercurrents of high unemployment, poor wage growth, a volatile stock market and rising imports appear to be the cause of great concern; thus my doubt about sustained growth.
Shop ‘til You Drop (Retail):
Shopping centers will face huge pressure as nationwide they appear to be overbuilt, though locally they seem to be OK (maybe our nightmare permitting process actually does have some benefits). The ills that affect the Consumer Confidence are brought to fruition in this sector. Watch for poorly located centers to close.
Overnight Guests (Hotels):
Hotels seemed to buck the downward trend both nationwide and locally as occupancy and rates have rebounded seemingly from a rise in business travel and summer vacationers. This is all good news for the hospitality industry; however, it will not bail out this over financed, under-performing sector as occupancy and room rates have not risen to the projections used to fund acquisitions and refinancing. There continues to be large debt service challenges ahead as loan to values and debt service coverage have not met expectations.
See through:
Years ago when I was visiting Houston, I heard for the first time the term ‘see throughs’ – referring to completed buildings with no tenants so you could see through entire floor plates to the other side. Nationwide we seem to be going that way, both with newly constructed and existing office buildings. The office sector continues to both shrink and play musical chairs as companies continue to upgrade their space while decreasing their rental expense and demand for space. Locally the first quarter showed negative absorption (giving more space back than taken off the market). In a 200+/- million square foot market (Boston to 495) there is almost 40 million square feet available. Like the Hotel sector, the office sector will have debt service challenges as rolling office debt needs to be refinanced at a time when rents have fallen and vacancy rates have risen and the banking sector continues its conservative ways.
Closing Thoughts:
Across all sectors, underperforming over financed properties will likely be returned to lenders. Consider as an example an office building financed three years ago at a reasonable 80% loan to value. Now values have dropped by say 40% and the borrower goes in to refinance. Well, that loan is underwater and the lender states that they will be happy to entertain a 65% loan to value based on the new value. This of course means that the borrower has to come up with equity representing 41% of the original value. Good luck.
I am still skeptical about the economy even though our corporations seem to be having a better time than in the immediate past. If one were to disaggregate their performance you might find that there is growth but not American job growth as some of those 8.5 million US jobs are probably lost forever. With approximately 15 million Americans out of work, there will continue to be stress across all sectors of the real estate economy.
Keith Munsell 
About time Keith! Looking forward to your writeups.
It will be interesting to see what impact the jobs report, to be released later today, will have on the collective spirit and mood of the country.
After reading one article lately, there’s no doubt a catch 22 is at play…”Without more jobs, Americans are likely to remain cautious with their spending, restraining the economic rebound. But without more spending, companies will likely be slow to hire.”