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Stan Ross Briefs A-T Medical Research Foundation Executive Luncheon Participants on Tuesday, May 15, 2001:
What a Difference a Year Makes!: One year ago, when I last spoke at the Executive Luncheon Series, Greenspan was nervous about inflation, the NASDAQ was at 3700, he was moving interest rates up and was worried about the wealth effect. What a difference one year makes. We're looking at an increasing unemployment rate, nearly 4½% at the end of April. And clearly the economy has slowed. Recession or Inflation? Greenspan recently told the house panel that recession was more of a risk to the economy than inflation. I think he's going to change again because the economy may be barely avoiding recession and it all ties to consumer confidence which is dropping. If the confidence level keeps dropping it will impact spending and this will be significant. The Stock Market Drop: Even with the recent rebound, Merrill Lynch, estimates a $3.7 trillion dollar drop in wealth, an incredible number. This could take $100 billion out of consumer spending. Interestingly, the consumer is not spending wealth/savings, they're spending disposable income, which is shocking and we're not sure how long that can continue. Real Estate is the Good Guy: When the Fed reported this to the House they said, 'Well we lost that much in wealth in the equity market but the good news is the real estate industry is terrific, increasing in value by $1.1 trillion'. They're saying real estate is the good guy this time around. However, the Fed members were nervous about real estate, and had nothing to pin their hats on. They kept saying be careful. They issued a statement last year saying, 'we think there are some problems in 13 markets with all the building that is going on.' They were dead wrong in every market. So there's no policy, but off the record nervousness. They're just saying, 'we've got to be real careful in our lending'. I Sat In At Greenspan Meetings: I attended a couple of meetings with Greenspan where he asked for anecdotal input. These are fun because they are behind closed doors, and he says, "I don't want charts, I don't want stats, I just want to know what's going on anecdotally, I want to know where the spending is." (1) March new home sales surged 4.2% and nobody forecasted that. (2) Car sales also picked up. (3) So shocking numbers are coming in, and Greenspan said, "Let's look at what's taking place with inventory." I took some notes: (a) Businesses is reducing investment. (b) Cutbacks are taking place across the board. (c) We have had company warnings from some of the biggest companies in the country like AT&T, Coca-Cola, Ford and Microsoft. (d) We had 670 dot-com's fail. (e) Pacific Gas & Electric files bankruptcy- unheard of. (f) Jobless Claims: Unemployment shot up to 4.5%. We have 223,000 jobs wiped out. How About The Banks?: The Fed asked, 'Are we going to go through the same difficulties and delinquencies and defaults that we did before?' (1) We have an incredibly low delinquency rate; we're not showing any bad numbers at all. (2) The trend of big bank mergers is shrinking the number of major players. (3) Very significant impact on the capital market for a lot of our big clients in terms of their inability to get the necessary syndications of the bigger loans. Energy: The entire infrastructure is a concern with all the smart growth initiative effecting planning, processing and the time cycle. Rising electricity costs reduces profitability on the commercial side. Electricity now in some places is accounting for 19-20% of operating costs. If you get a 50-60% increase, it boosts your operating costs by 9-10%. In LA, electricity could represent 23% of operating expenses. California ranks last among the 50 states in per capita spending on infrastructure. The Feds are concerned about it because California counts for more than 12% of US GDP. The Bush Administration: Bush pulled out his typical developer's pro forma and he submitted it in Washington. Present growth has reduced to 2.4% from 3.5%. So he did what any good developer doing a 10-year pro-forma would do. He showed an annual growth of 3.2%, which gave him the surplus; that's just the way I do my developer profiles. So I had no problem with it. My Most Creative Client Dealing With the IRS: I looked at his tax return before we sent it in. He attached a letter, saying: Enclosed is my tax return and payment. Please also note the attached article from USA Today in which you will see that the government was paying $171.50 for hammers and NASA paid $600.00 for a toilet seat. Enclosed are four toilet seats and six hammers representing full payment of my tax for the current year. A Disconnect in Bid and Ask and Fewer Properties Changing Hands: There were about 400 sales of buildings in 2000 with more than 100,000 square feet compared to 642 in 1999, big drop. We don't see a closing of the gap between the bid and the ask price happening quickly. An estimate of 1/3 of all properties listed up for sale were dropped because sellers couldn't get their prices. Sellers are sitting back and asking 'Why am I selling? Where am I going to put my money? Where am I going to get a better cash flow? Why should I go out and pay any taxes? It doesn't make sense." Office Vacancies Are Rising In Some Markets Impacting Rents: Cushman & Wakefield issued a report about the San Francisco market saying they believe that nearly 80% of existing internet companies in San Francisco are expected to die during the next year. Rent concessions are starting to show up around the country. Vacancy rates are still high, even here in LA, we've seen in the concessions 4-6 months of free rent in tenant improvement. We've seen free rent in Phoenix. We've seen landlord TI dollars increasing. So we go around the market and Dallas is just beginning to creep in and New York in the last six months, a million and a half square feet were put back into the market place. Bottom Line: We got used to 12% annual rent increases. Upcoming years, maybe minus 1.5%. Summary: I'll leave you with a mixed message, not a lot of good news but not a disaster. We have to watch things closely and be realistic in our decision-making.
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