The End is Nigh!

The end is nigh! Of what you may ask; our economy, the financial system, sustained growth, or leverage? How about the recession?

There's a refreshing thought! Dr. Nouriel Roubini has reiterated his prediction that the recession will have ended by the end of this year and we will return to growth in 2010. Dr. Roubini has been credited with calling the start of the recession before most.

Dr. Nouriel Roubini, the well respected Professor at New York University, Stern School of Business and frequent contributor to CNBC, has come out and reaffirmed his prediction that the recession will have ended by year end. Dr. Roubini has been credited with calling this recession before most and when doing so stated that it would last 24 months. By his reckoning we are 19 months into the recession with another 5 months to go.

Before getting too excited, note that he has also stated that our recovery will be slow and shallow. Looking to the positive side of this, I believe any sign of growth, even minimal, is necessary to get consumer sentiment positive again. Renewed growth should also see a significant reduction in new jobless claims and this will have the most significant bearing on positive consumer sentiment.

This could be the spur needed to get the residential housing marketing going again. Watch out for the Spring 2010 residential sales figures for evidence that the consumer has come out from the bunkers.

Home builders amassing land banks again.

In a sure sign of land prices bottoming out, home builders have begun to acquire land in prime locations to add to their land banks for future hosing development. This could also point to a near term turning point in the housing market in regions that were not overdeveloped such as Massachusetts.

Major developers such as Lennar Corp. and D.R. Horton Inc. have been active in the marketplace picking up prime sites. As an example of how land prices have fallen over the past three years, since 2006, 13 of the largest US home builders have seen the combined value of their land banks diminish from $73.1 billion to $28.4 billion today.

In some cases developers can acquire land from banks, either pre-foreclosure or after the bank has foreclosed, where all the infrastructure work is completed (roads, drainage, sewer, utilities, etc.) at a price that equates to the cost of the completed infrastructure. This in effect means the land is for free. Why would you not be a buyer in such circumstances?

Latest from local commercial market.

Boston office rents have seen steep declines to levels not seen since 2001. The average office rent in Greater Boston now stands at $28.11 per square foot. This is a 12% decline from the same quarter last year (Q2 2008).

Vacancy rates and available sublease space are also on the rise. Currently there are 5.1 million square feet of sublease space available, a 40% increase on the same period last year. Nationally available sublease space grew 10% from last quarter to a whopping 85 million square feet.

The Hotel market in Boston has not fared any better with the average 2009 revenue per available room projected to fall by 19.5% on the back of falling occupancy and decreased room rates. This drop mirrors the national trend of a projected drop of 18%, with luxury hotels being hit the hardest.

I commented back in my April update on April 17th, how the John Hancock Tower in Boston had been sold for $660 million, down from its last sale price of $1.3 billion three years earlier, which was a staggering 50% drop in value. Well this month in New York that staggering drop in value was surpassed when the 47-story Worldwide Plaza was sold for $600 million, representing a 65% drop in value from its last sale of $1.74 billion in February 2007.

This represents $375 per rentable square foot, not bad for Manhattan. This could have major implications for the rental market however, as the new buyer will be able to charge below market rents given their lower cost base of acquisition, which could result in a further depression of the rental market in Manhattan.

I was interested to learn recently that Vornado, one of the largest REITs in the US, is raising up to $1 billion in a private equity fund to invest in the many anticipated upcoming distressed commercial real estate opportunities. I wonder could this private fund perhaps bid on a certain distressed development in downtown Boston called Filene's? It turns out that crater in the center of Boston is owned by one of Vernado's REITs!