2011 – 1st Quarter Economic Perspective

Cautiously Optimistic!

I know this is a platitude, but nonetheless true. The macroeconomic indicators are encouraging! GDP posted a positive 3.2% increase in the 4th quarter of 2010 and is expected to exceed this pace into 2011. The nation added 1 million jobs in 2010 and 36,000 non-farm payroll jobs in January 2011, helping lower the U.S. unemployment rate from 9.4% to 9%. Government tax incentives helped the residential housing market in 2010. With new housing starts at historic lows (529k annually adjusted) combined with six straight months of increasing sales of existing homes (5.28M annual adjusted), the supply of housing, measured in months fell from 9.5 in November 2010 to 8.1 months in December 2010. The macroeconomic indicators relating to commercial real estate, especially the retail sector are positive as well. According to Michael Niemira, chief economist for the International Council of Shopping Centers, consumer spending has been improving for more than a year. This past holiday season, stores experienced the strongest sales increases since 2006, with same store increases of 5.5% from 2009 levels. Despite snowstorms over most of the country, strong retail sales continued into January with increases of 4.8% compared with one year ago. Retailers beating sales expectations for January 2011 included not only value oriented stores such as Costco and McDonald’s, but also fashion retailers, such as Victoria’s Secret, Macy’s, Limited Brands, WetSeal and even aspirational retailers such as Estee Lauder.
According to the CoStar Group, a leading real estate research group, leasing activity and occupancy of U.S. malls and shopping centers continued to improve across the country in fourth-quarter 2010. Over 13 million square feet of positive absorption occurred in 2010. With very little new supply anticipated until 2012 and retail profits quickly rising, rental rates are expected to rise as retailers will be under less pressure to cut occupancy costs.

Capital Markets have improved remarkably over the past 18 months as well. Lenders, especially life insurers and foreign banks, have re-entered the commercial mortgage market, creating more choices for borrowers as well as lower mortgage rates and higher loan-to-values ratios. Commercial Mortgage Backed-Securities (CMBS) markets have also shown signs of life with new securitizations totaling $ 11.6 billion in 2010, nearly a threefold increase compared with 2009 and is expected to reach $40-$50 billion in 2011.

Investment in retail real estate is in the early stage of the next up cycle, according to David Lynn, director of ING Clarion Partners in NY. The global search for yield rapidly put downward movement on cap rates of institutional-quality assets in primary markets. “With improving fundamentals, the commercial real estate market will attract significantly more investors. Investment activity will likely expand beyond traditional core into the lesser-quality assets and secondary markets in 2011.”

All this ties into the continued strategy at Morris Capital Partners, which is to deliver exceptional risk adjusted returns by targeting non-traditional core retail assets and assets in fundamentally sound secondary markets. Assets for consideration will either have strong, predictable cash flow or a significant “value add” component. While cap rate compression may continue to occur, most of the value we will deliver will be achieved by re-capitalization, both financial and intellectual.