The ISM’s non-manufacturing report is made up mostly of services and as such, describes the bulk of total U.S. economic output. Both lines on the chart spell more trouble going forward.
ISM Report On Business – Nosedive
A Downturn For CBRE
A plummeting stock price and staff layoffs – CB Richard Ellis is tight on cash due to reduced business income. In the last year its shares have plummeted 75% in value to $5. The company said it had cut $190 million in fixed costs this year, in part through eliminating about 1,100 budgeting positions. CBRE also reduced it marketing and travel expenses.
They are not alone. Jones Lang LaSalle Inc’s stock is off 66% from last year. Grubb & Ellis shares have fallen about 80% in value. Cushman & Wakefield may not be publicly traded, but their owner is not American, rather an Italian company. A commercial real estate buyer, seller, tenant or landlord may want to consider an American owned firm that is not strapped by the above mentioned forces.
CMBS – Commercial Real Estate Mortgage Backed Securities
The market for commercial mortgage-backed securities (CMBS) already is in the midst of repricing assets and setting new standards for future loan originations. CMBS will come back as a significant lender for commercial real estate, but with new guidelines.
In the future, CMBS conduits are likely to make smaller loans than they did before and the debt will not be sliced up and repackaged in as many securitized bonds as the industry had seen during the past few years. There will need to be more due diligence requirements for originators that are similar to what they have in the stock market. Perhaps the originators will have to keep some interest in the loans they sell so they keep a stake in how it performs.
Availability of debt is a crucial factor in determining real estate pricing and capitalization rates. With all else being equal, higher debt availability at lower rates implies increased investment activity, which in turn bids up prices of real estate assets and exerts downward pressure on capitalization. Conversely, lower debt availability means lower asset prices and higher capitalization rates. Additionally, less transaction volume and rising vacancies will contribute to reduced pricing of commercial real estate properties.
A lot of Los Angeles industrial properties, either warehouses or manufacturing buildings, have been packaged into CMBS.