Recession over in Colorado, economist tells legislators

Recession over in Colorado, economist tells legislators

By CHARLES ASHBY/The Grand Junction Daily Sentinel

Friday, December 18, 2009

The recession in Colorado is over, but the recovery is just beginning, the Legislature’s chief economist declared Friday.

Natalie Mullis told state legislators in Denver that while all signs indicate the worst recession to hit the state since the Great Depression has ended, the recovery, particularly in jobs, will take years longer.

“There are a lot of glimmers of light,” she said. “We’ve had over the last year, a free-fall in consumer spending (and) it looks like that free-fall is over. So, it looks like the recession is over, and the recovery is beginning. However, the end of the recession does not mean the end of difficult times.”

Mullis said the last time the state had a recession earlier this decade, it took five years for jobs to reach pre-recession levels. This time, the state lost about 5 percent of its job base, and she’s predicting that won’t return until well into the next decade.

Part of the reason behind that, she said, was the credit market.

“The recovery is going to be constrained primarily because the credit markets are constrained,” Mullis said. “The banks, while they are shoring up their bank balances, still have to deal with problem loans. They still are facing additional burdens related to the recession’s impact on the commercial, industrial and retail real estate markets. It’s going to take several years for the credit market to loosen.”

In a 93-page revenue forecast, Mullis said the Western Slope will have a harder time in its recovery because it is too closely tied to the oil and gas industry, which won’t begin to see real recovery until natural gas prices rebound.

Unemployment rates in the region fell to 6.8 percent in October, more than double what they were a year earlier, she said.

“Mesa and Garfield counties, in particular, have been significantly affected by the decline in the natural gas industry,” according to Mullis’ report. “During the first week of December, a total of 34 rigs were operating in Colorado, down from 109 rigs at the same time last year. In Mesa County, not a single natural gas rig was operating during that period, down from nine that were operating at that time last year.”

The report said consumer spending in the western region of the state dropped nearly 21 percent in the first nine months of the year, with some counties in the region seeing greater drops.

Mullis said residential construction in Mesa County had dropped 47.7 percent in the first 10 months of the year, and the number of foreclosures was up to 165 in October, compared to 44 in October 2008.

Mullis did point to some good news for Grand Junction, including a proposed new Colorado National Guard armory that is to have 130 jobs, a new U.S. Census Bureau office that is to hire up to 1,000 temporary workers for the 20-county region, and Cabela’s announcement it would open a 75,000-square-foot outfitter’s store in town.

Sen. Josh Penry, R-Grand Junction, said that while the overall picture may be looking up, the state, and particularly the Western Slope, still faces a difficult recovery.

“There’s been a lot of rosy scenarios coming from some in the Capitol, but the reality is we’ve got some difficult months in front of us,” he said. “I look at this community on the Western Slope, and most indications are we’re in for a long 2010.”

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Denver commercial investments fall to $250 million

Exclusive: Denver commercial investments fall to $250 million

Patrick Devereaux, an investment broker at Cushman & Wakefield, found that commercial real estate sales this year in the Denver area are at the lowest point in recent memory.

Investors purchased only $250 million in Denver-area commercial real estate properties this year, the lowest tally on record.

And a single deal, the $134.25 million purchase of the 32-story, 17th Street Plaza, accounted for 53.7 percent of the total sales volume. Without that deal, there would have only been $115.750 million of office, industrial and retail properties of more than $1 million each, shows the report released to InsideRealEstateNews.com by Patrick Devereaux, a senior director of the Capital Markets Group for the Denver office of Cushman & Wakefield.

“What is going on in commercial real estate is analogous to what is happening in residential real estate,” Devereaux said in an interview in his office at Independence Plaza in downtown Denver. In a nutshell: Fewer properties are selling for less money.

But the downturn is even more pronounced on the income-property side.

This year’s sales volume is 85.7 percent lower than the $1.725 billion in sales in 2008, the biggest year-over-year percentage drop on record. It was the first time since 1996 that the sales volume had dropped below $1 billion. Even in 1992 – as far back as Devereaux’s records go - there was $365 million in sales, 31.5 percent more than this year. And while sales volumes in the 1980s at times fell below $250 million, if adjusted for inflation, they almost certainly were higher in today’s dollars.

Indeed, J.P. Morgan this year sold 17th Street Plaza for an estimated 30 percent to 40 percent less than it was it had been negotiating to sell it for last year. But even at the reduced price, the purchase of the 662,653-square-foot building by HRPT Properties Trust, a real estate investment trust, was one of the largest office deals of the year in the country. The building was sold by Mary Sullivan and Tim Swan of CB Richard Ellis. REITs, priced out of the buying sprees of a few years ago, are returning to the market because they can raise money on Wall Street and acquire buildings at a low enough price that they can pay investors dividends, Devereaux said.

And, also, as with the residential market, “all of the buyers want to feel as if they’re getting deals,” Devereaux said.

And they are, he said.

Investors are buying properties at below replacement cost, he said.

And with the residential sales market, it is difficult for buyers to get loans.

“Only a handful of banks are really in the market,” Devereaux said. And buyers need to make hefty down payments, just like someone buying an expensive home, he noted.

There also is a disconnect between prospective buyers and and property owners, he said.

Buyers are looking for “value-add” opportunities, where they can buy properties cheap, fix them up and re-tenant them. Owners, meanwhile, want to wait until the fundamentals of the market improve, so they will fetch higher prices, he explained.

And while current owners have little motivation to sell, investors are increasingly looking to buy distressed properties, just like it has been the case with many home buyers.

“The new clients are going to be the lenders,” Devereaux said. And while most of the income-producing properties that have been sold by lenders so far have been B and C properties – that is, older, less-well-located buildings than Class A – it is only a matter of time before some trophy buildings are sold by lenders, he said.

“Lenders will stop amending loans and delaying foreclosures, resulting in a surplus of assets on lenders’ books,” Devereaux said. “The number of distressed assets for sale will increase in 2010. It will not be a flood of product, but the cycle will last for years.”

Devereaux said the perception among would-be buyers it that they will get better deals, once the buildings are in the hands of the lenders. “I’m not sure that is going to be the reality, though,” he said. “There are going to be a lot more people bidding for properties in foreclosure or in a receivership, so the competition may drive up prices.”

The good news, he said, that as with the residential market, Denver seems certain to bounce back quicker than most national markets. The same economic forces drive both residential and commercial markets. Denver did not become as overbuilt as other markets, its unemployment rate is lower than most parts of the country and the national average, and the economy is more diversified than it has been historically.

“Denver will continue to be a preferred market,” Devereaux said.

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.

Monday, December 14, 2009, 10:01pm MST | Modified: Tuesday, December 15, 2009, 7:13am

Brookings studies recession's impact on Rockies

Denver Business Journal - by Renee McGaw

The cities of the mountain West have felt the recession as deeply as any in the nation, although the pain has not been spread evenly, according to a report Tuesday.

Denver emerged as one of the strongest cities in the six-state region on a number of measures, according to the report by Brookings Mountain West, a partnership between the Brookings Institution and the University of Nevada.

“Phoenix, Boise, and Las Vegas... remained three of the most troubled metropolitan areas in the entire nation in the third quarter, with all residing in the weakest quintile of metros on a combined measure of overall economic performance,” researchers wrote. “Still, metros like Colorado Springs, Albuquerque, and Denver have only been moderately affected by the recession and seem poised to renew their upward trajectory as the pace of recovery quickens.”

Denver’s unemployment rate averaged 7.1 percent in the third quarter, below the 100-city average of 9.6 percent. It ranked 14th of the 100 cities in terms of unemployment rate — with 1 signifying the strongest-performing metro and 100 the weakest-performing — and ninth in terms of change in the unemployment rate over the 12 months ending in September.

The city also fared well on housing prices: over the 12 months through September, Denver house prices were up 1.6 percent, compared with an average drop of 3 percent.

But foreclosures remained a problem, with the city ranking 76th out of 100 in terms of real-estate-owned properties per 1,000 mortgageable properties.

Denver ranked 70th for gross metropolitan product, and 57th for employment growth.

Click here for the full report.

rmcgaw@bizjournals.com

Real Estate Outlook: Housing Warmer Than Weather

December 15, 2009

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Real Estate Outlook: Housing Warmer Than Weather
by Kenneth R. Harney

If new applications to buy homes are any gauge, the U.S. housing market is warming up, and that's despite the fact that we're now into the traditionally quiet holiday season.

Applications for home purchase loans soared 42 percent last week on a non-seasonally-adjusted basis compared with the week before, according to the Mortgage Bankers Association.

That burst of activity may have been influenced in part by the long Thanksgiving week layoff. Or it could have been an early reaction to the extension of the $8,000 tax credit or the start-up of the new $6,500 credit.

Either way, it was an exceptional week for mortgage lenders.

But here's another possibility: With the economy gaining a little momentum, interest rates have begun edging up again.

Mortgage rates are still close to historic lows, 4.9 percent on average for 30-year fixed and 4.3 percent for 15 year fixed, but MBA chief economist Jay Brinkmann says they're likely to exceed 5.2 percent by this coming March.

So, maybe the rush to nail down financing by home buyers is a smart move … compared with paying half a point higher rates by early spring.

On other economic fronts, we're looking at a mixed bag of reports this week, though mainly positive:

Freddie Mac's found home prices nationwide up by about one point on average during the third quarter. That's on top of a two percent gain for the second quarter. Clear Capital, a real estate data company, also found prices up marginally - by 1.4 percent - during the month of November, though a few local markets came in with double digit gains.

But not all surveys agree on that. The well-regarded “IAS 360” index came in with a contrarian result. It found that overall prices in the U.S. were down slightly on average -- by about half a percent.

Since there's not a huge variation among the three reports, we can probably safely conclude that -- at the very worst -- prices have stabilized in most markets -- and at the very best, they're up a little.

There were also positive indications on lower delinquencies and foreclosures across the country. Realty Trac says foreclosure filings in November dropped by 8 percent - the fourth consecutive month of declines.

And Trans Union, the big credit bureau, forecasts three percent fewer mortgage delinquencies next year - after three straight years of rising delinquency rates.

Meanwhile, ZIP Realty's latest national study on price reductions on listed properties found that during November the number of price cuts dropped in 27 major markets, a welcome sign of more realistic asking prices.

Good Deals For Prospective Condo Buyers

TheDenverChannel.com

Related To Story Video: Condo Prices Still Falling

Good Deals For Prospective Condo Buyers

Experts Say It's A Buyers Market But Loans Still Hard To Get

POSTED: 5:36 pm MST December 14, 2009

UPDATED: 8:28 pm MST December 14, 2009

DENVER -- If you're interested in the urban lifestyle, there is great selection. However, real estate experts warn prices will probably continue to drop and it could be hard to get a loan."There’s a huge discrepancy with the low end, and not even the luxury market, even $285,000 to $300,000 you have a lot of inventory right now, which is why you’re seeing sellers trying to sell and prices coming down in a lot of these areas," said Charles Roberts, a mortgage broker with Your Castle Real Estate.Prospective buyer Blake Harrison agrees."Obviously there’s selection, but some are more than they’re worth," said Harrison.Harrison said he's attracted to condo living because of the low maintenance, the amenities and the location.

In Denver, condo prices vary greatly. Even at "The Spire", located on 14th Avenue in downtown Denver, units range from $200,000 to $1.1 million."What we’ve seen in this economy is we’re selling from the bottom up," said Chris Crosby, the Executive Vice President of Nichols Partnership, the developer.Of 493 units, Crosby said they had sold 110. The first buyers will move in next month."We’ve been selling about three to four per week here so sales velocity has been pretty strong," said Crosby.However, Crosby acknowledges that buyers have a lot to choose from. In part, he credits incentives for helping to sell units."We’ve done a $35,000 dollar incentive on some selective floors," he said.

Crosby said that means buyers can take $35,000 dollars off the selling price, or get that much in upgrades."They’re making deals. They want to get these things sold," said Roberts.So, 7NEWS asked if it's a condo is a good investment right now."If you’re an investor, and it makes sense for you it can be a very good time right now, the rents are fairly strong and the interest rates are low," said Roberts. "

As an owner, sure, if you want to live some place and you’re going to be there for awhile and you’re qualified right now, it’s great."However, Roberts added prices will probably continue to drop before going up.

"The prices have gone down about seven percent in the last year. They went down about nine percent the previous year. I personally don’t think we’ve hit bottom above $200,000," he said.Getting a loan can be difficult too, according to experts."They’re usually treated as a more risky investment," Roberts said. "You’re not just buying your condo. The lender has to buy into the whole project. They’re going to want to know what percentage of the other units are owner-occupied. They're going to want to see 51 percent of units owner occupied. Also, with new developments, they need to see construction pre-sales."

Roberts said be prepared to have 10 percent down in order to qualify.

• December 9, 2009, 5:24 PM ET

Why Loan Modifications Are Like ‘Jurassic Park’

Everett Collection

Controlling the dinosaurs in “Jurassic Park” proved difficult.

As he appeared before the House Financial Services Committee Tuesday to discuss the slow progress of government efforts to force lenders to ease payment terms on home mortgages, Anthony B. Sanders was reminded of the movie “Jurassic Park.”

It might be possible to bring dinosaurs back to life, but does that make it a good idea? Similarly, says Dr. Sanders, a professor of real estate finance at George Mason University, it might be possible to slash interest rates on millions of loans, but that doesn’t mean we should.

What if the government’s Home Affordable Modification Program somehow finally gains traction and manages to reduce interest rates to 2% on millions of loans and extend their terms to 40 years? That would just create fresh problems, Dr. Sanders says.

“Our banking industry, Fannie Mae, Freddie Mac and our Federal Reserve would now be sitting on trillions of dollars of mortgages, many at super-low interest rates and stretched maturities to 40 years,” he writes. Any rise in inflation and interest rates would then slash the value of those mortgages. “When one considers the precarious balance sheets of our lending institutions and our government agencies, we should think very, very carefully about loading up their balance sheets with these mortgages,” he warns, adding:

“Congress and the Administration should bear in mind that it is not just the banks that will suffer, but our pension funds, our own government agencies and the viability of the economy going forward.” Banks would be “stuck with low-interest, long-maturity loans on their books that will prevent them from lending to other borrowers or small businesses for a long, long time.”

The solution, he says, is to encourage financial institutions to sell distressed loans and mortgage securities at big discounts from face value to private investors, who could then restructure the loans on realistic terms related to today’s house prices. Such sales would force banks and other financial institutions to book big losses, but perhaps regulators could allow those losses to be absorbed in stages over five years.

If U.S. financial institutions don’t clean up their balance sheets by shedding dud assets soon, “we will make the Japanese zombie banks look the role model for a healthy financial system,” Dr. Sanders says.

But what about all those borrowers struggling to avoid foreclosure? “The (loan) servicers and financial institutions should be able to modify distressed loans as they see as economically appropriate,” Dr. Sanders says. “After all, these are private market contracts between borrowers and lenders.”

Please follow me for housing news on Twitter at: http://twitter.com/jamesrhagerty