It has been said that “the only thing constant is change.” While this is true, the rate of that change is anything but constant. If you pause to reflect on how rapidly things are changing all around us, you will realize that momentum is building and the change is picking up pace.
While this change has been unwelcome to many Houstonians, and most of the business owners that I am in contact, the very idea that the rapidity of this change means we may actually be able to see the changes manifest within our lifetimes is thrilling to me. Whether you feel the same way or not, it does make predictions such as these a bit more difficult to pen.
I’ve managed to get a majority of predictions right in my still young days, but admittedly I did not anticipate how quickly or strongly the stock market would rebound in 2009. In 2008 to the present, I did not expect such a precipitous decline in real estate values, especially within my passion: commercial real estate – which actually seemed to move parallel to the stock market, yet still have not corrected. So…
Here are my 12 predictions or best guesses for what will transpire in 2010:
1. Houston: We Do Not Have A Citywide Recession – By Year End.
The shock to the financial system produced significant volatility, which is now easing. Volatility creates fear. When businesses are fearful they will not make major decisions, banks ultimately will not lend, and a shake-out will occur. The shake-out in Houston is still underway as the tremors of Wall Street volatility continue to be felt. My simple prediction for Houston is that the weakest business sectors in 2008 and 2009, will likely be the most promising industries in 2010, albeit for a short-term. Houston’s base employment will decline – but not close to the 100,000 we saw in 2009. Just a few shocks. Added, the government will increase its presence in the city via census and new jobs, this will buoy the employment market to positive numbers by year-end. Understandably, via significant government intervention, we are kicking a can down the road. But I feel all of the credit bubble, national debt, doom mongers will likely have to hold their tongues throughout 2010.
2. Houston Tenants: Get Prepared, Opportunities are Appearing
The commercial real estate sector, to which I specialize, is feeling the effects of a dried up lending market. From a commercial real estate owner’s perspective, things look dire. Because businesses are finding themselves not having the available resources to cover the monthly nut, they are shutting down. As building materials and labor are not seeing significant declines, landlords are getting squeezed. So, in turn vacancy has risen dramatically in 2009, most of which is occurring in the 2nd half of the year. To combat, Houston commercial real estate landlords and lenders are reducing tenant improvement allowances and getting tough on the building’s controllable expenses to offset a drop in rental rates and/or above-average tenant concessions. I believe that no time since the early 90’s will concessions be so widely used to attract tenants as they will be in 2010. Lease renewals dominated the 2009 leasing market, but as downsizing and deferred maintenance issues arise, I think the second half of the year we will see a pickup in companies relocating. Thus the spread between good buildings and bad buildings will widen and likely begin to accelerate in late 2010, possibly start of 2011. Expect end of 2010 rental rates to mirror 2004 or 5’s. In essence, the office leasing market will have pulled the slack from the 2006-2008 increases – tightening the rope towards a longer term trend. This sudden reduction in rents will create building foreclosures for those who purchased during the period.
3. Deflationary Pressure Continues
I believe the U.S. and world economy will likely experience a continued deflationary dip during 2010. Banks are still not lending and the expansion of the monetary base is not keeping pace with the massive contraction in the credit markets. With the commercial real estate shoe yet to be realized and a glut of production capacity, deflation is the more likely an immediate threat to the economy. I believe the Fed and government pull out all of the stops to fight the deflationary threat. With new consumer stimulus programs, tax rebates, government lending, pressure on the banks to lend and the printing presses running overtime, all of the newly-created money will eventually work its way into the system and as the velocity increases, deflation will subside and inflationary pressures will materialize. This could easily spiral out of control and lead to hyperinflation in a few years, as no matter how confidently Ben Bernanke speaks of his abilities, once the money is created and flows into the economy it multiplies via fractional reserve banking and becomes very difficult to soak back up. So while I view widespread inflation as inevitable, I don’t think it will happen in 2010.
4. Stock Market Rangebound
I believe the plunge protection team will continue to support the stock market during 2010, although the growth will slow considerably. As stocks are mainly a cash market, the deflationary impact felt in the credit markets will have little impact on stocks. The market is due for a correction and there may be short volatile swings as investors lose confidence, but I think the market will end the year little changed (+/- 5%). No doubt, the market is on life support without an injection of liquidity via the government and Fed.
5. Fed Funds Rate to Remain Near Zero
While many are anticipating a rise in rates during 2010, I believe the Fed will be forced to keep rates low due to deflationary pressures. Any rate increase would wreak havoc on the markets and this is the Fed’s biggest fear. At most, a small increase could occur towards the end of 2010. Higher rates are certainly on the horizon, but I think we need to see much higher inflation before the Fed changes course.
6. National Real Estate Prices Flat to Lower
Real estate prices are likely to flat-line or decline during 2010. As real estate is heavily reliant on the rapidly-contracting credit market, deflation will trump any inflationary pressures created from the expansion in base money. There is an over-supply of housing and the high rate of foreclosures is likely to continue or increase during 2010. I believe real estate will be an excellent buy at some point in the next 5-10 years, but it is not near a bottom yet.
7. Unemployment Remains Stable
Officially-reported unemployment (U-3) will hang around 10% for most of 2010, but could rise to as high as 12% nationwide. Of course, true unemployment that counts marginally employed and discouraged workers is closer to 20% currently. Government will be the major source of any new jobs, as private enterprise and small businesses continue to struggle. Of course, any wealth or jobs the government claims to create is really just a wealth transfer and not true or sustainable growth.
8. U.S. Dollar Rallies, but Drops to New Lows by Year End
With rates likely to remain near zero, I anticipate more dollar weakness during 2010. The Fed doubled the supply of base money during the past year, deficits are at record levels and Asian countries have already begun diversifying out of dollars. There have also been reports that several other countries are following suit. If the dollar begins to lose its status as world reserve currency, look out below! The current bounce could continue a bit longer before the plunge, but by the end of the year the dollar index will be at or below 70.
9. Gold and Silver to Make New Nominal Highs
While some are claiming gold has peaked, I believe gold is nowhere near a top and will reach a new nominal high between $1,200-$1,400 during 2010. That is not to say it won’t go below $1,000, first. Overall, I see a volatile year for the metal. Gold can perform well during periods of inflation or deflation. While I believe deflation is the greater threat during 2010, this will occur primarily in credit-based markets such as real estate. Cash-based markets such as precious metals are likely to experience inflation as record amounts of new money have been printed during the past year. Look for more central bank purchases during 2010, as well as significant purchases from China and other countries that are eager to diversify away from dollars.
10. Energy Prices to Trade in Range
With the strengthening economy, increasing demand from China and India, plus declining supplies, I expect energy prices to move higher during 2010. As I write, we are already nearing $80. Oil will trade most of the year in the $70-$90 range, likely nearer to the upper end of the range. I think natural gas will generate even greater returns than crude oil as it bounces off oversold lows. In addition, I expect clean energy companies to rebound during the 1st half of 2010 and think lithium and rare earth miners will benefit from this trend.
11. Agriculture Prices to Rise
One thing that is certainly not in over-supply is agriculture. With a very poor harvest season, lack of water in key agricultural areas and exploding demand from a growing middle class in Brazil, Russia, China and India, I believe prices for many food items will move higher in latter 2010 and significantly higher in subsequent years.
12. More Bank Failures, Political Tension, Voter Discontent
I anticipate a large number of banks will fail during 2010, more than double that of 2009, allowing the largest banks to scoop up smaller competitors at bargain prices. People will become less apathetic as government meddling and banker exploitation will finally begin to hit everyone in the pocketbook. Look for more frugality, local buying, community organization and a move towards becoming self-sustaining.
- The best financial infographics of 2009.
- Harris County toll roads to pay for new roads, not old ones.
- CPI falling, lowest since 2002.
- Top 10 Houston blogs – as I see it.
- Blogger asks “Why aren’t banks lending?” and suggests their rationale is simple.
- Don’t Mess with Texas: More Americans Moving In.
- When will the Fed raise rates? Not 2010 says chief economist.
- How effective will the stimulus be in getting the economy moving?
- Continental Airlines gets new CEO.
- The Feds are coming! The Feds are coming!
- Deal – 10 Year Term, 2 years free rent, 100 P/SF in buildout allowance, 7 year termination clause.
- Falling Oil Demand a boon for tank owners. (Financial Times, free registration)
- TXDot approves widening of I-10 project from Washington to Taylor.
- Supply data causes spike in energy futures.
- Mortgage spreads coming down in December. Retail sector fares the best.
- Chilly climate for oil refiners.
- Blogger gives Christmas gifts for Texas politicians. Funny stuff.
- Chevron to pay $45 million for underpaid royalties. Likely, more headlines to come.
- Some Houston IPO’s for 2010.
- Jobless claims fall, unexpectedly. Recovery gaining steam.
- US Stocks close at highest level of 2009.
- 2010 inspirational quotes!
- Government revises GDP downward, again.
- Senate votes 60-39 on healthcare bill.
- Washington working on a community bank aid proposal to help small business and commercial real estate.
- HBJ survey: Houston execs see tough years ahead.
- Wells Fargo repays government bailout money.
- New home sales sink, in Houston.
- No train horns on Washington Avenue by April. City sees 6 “quiet zones”
- Galveston Ports hold off rate increase.
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Houston Press Spin-Off. Hilarious.
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- More Allegations of Sexual Harrassment and Abuse at the Houston Humane Society
- Business is Booming in the DWI-Arrest Industry
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- An Agenda for Mayor Parker
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- What’s the Status of the City’s Sorely Needed New Emergency Radio Network?
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- That Wild Landry’s Ride Continues
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- Houstonians Want Safer Streets
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- Saved by a Ham: The Museum Plan for Immanuel Lutheran Church
- Daily Demolition Report: Demo Defender
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Everything Houston. Great site that toes the line of news and blog.
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- Plan proposed to save Historic Heights Church
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Voted by Robert S. “Bob” Lowery
- Humble prepares for new surgical center to be built.
- Citigroup giving away free rent in December.
- Known as an economic indicator, Fedex sees greater package volume – stock down 10% in week.
- Leading indicators (economy futures) rise for 8th consecutive month.
- Greater Houston Partnership predicts positive employment for 2010.
- Good week, month, and year for nat gas. Up significantly this week on record supply drop.
- Morgan Stanley dumps another 5 office buildings it had purchased – this time from Blackstone.
- Luby’s expects net loss in 2010. I take this to mean a price reduction for the fried fish Luann platter.
- Economy mending, no job growth though.
- Unemployment rate decreased in 36 states in November. Houston dips from 8.4 to 8.2%
- Houston ranked 95th of 100 big cities with regards to “safe” drinking water.
- Obama administration plans $30 Billion to small firms to open credit.
- Sharptown Mall shedding image.
- Fed keeps interest rates at record lows.
- Shell shipping jobs overseas. Hundreds in Houston to be affected, this holiday season.
- 45% of workers in Detroit affected by downturn.
- Port Authority approves $235 million sale of unlimited tax refunding bonds.
- Green Builders awaiting their green.
- Banks to small biz: Show More-Have a Plan B-Improve that Credit Score.
- Love him or hate him – Immelt says Houston needs to lead in clean energy.
- Mariner Energy to buy Edge Petroleum’s assets.
- Builder confidence declines. Depression in sector noted.
- Hotwire says Houston hotel rates have dropped the most in the country. Is now the time for hotels to “go condo?”
- Texas Transportation Commission designates Prop 12 funds for 290 and 610.
- Knock-off designer items seized $4.3 million crackdown. Harwin trembling.
- BlogHouston claims evidence that Houston is broke – budget stretched too long.
- BAE Systems and the 10,000 jobs on the line in Texas.
- Houston’s Apartment Sector most distressed in state.
In my previous article, 5 Negotiable Items in your Office Lease, I explored items of negotiation in your office lease. The typical office lease that our tenant representation group comes across is approximately 40 pages, with 5-10 exhibits. Within a lease are hundreds of negotiable items, some downright (Texas term) questionable. Believe me when I tell you that office leases are evolving to heavily favor landlords, especially now that many are in the red. As I write, landlords and attorneys are structuring creative lease clauses in an effort to pass their “controllable” costs on to businesses like yours.
Next 5 Negotiable Items…
As tenants, large and small, have vacated their respective spaces in 2009, many owners are finding themselves in the furniture business. In many office buildings that have 50,000 SF or greater, a selection can be vast. With the over-abundance of office furniture that is currently available, prior to signing on to a building space, ask whether any furniture will be provided. Also request that after your lease expires you have ownership right or responsibility. Depending on your situation, you may or may not want the office furniture because of its difficulty and expense to move. So, your best bet is to negotiate free use of the furniture and the right to keep or purchase it at the conclusion of the lease, should you want to take it with you to your next location.
7. Expenses (Upfront)
Larger companies have the ability to get landlords to contribute to the upfront costs of the move process. This can only be negotiated during times where the market has a lot of vacancy. Small business typically can accomplish this same concept through free rent, as noted in item #4.
8. Security Deposits
Security deposits are typically a function of how much money a landlord will spend to get you to move into the space (commissions and tenant improvements) vs. how confident they are in your ability to pay rent (financial statements review). We have seen security deposits range from 1-12 months depending on the situation. A good rule of thumb is 1-3 months of security deposit for a small business who needs only minor improvements and 2-6 if offered a turnkey build-out. A larger company, in today’s leasing market, is not likely to have to place a security deposit.
9. Commission Payment
If you are represented by a tenant rep broker, you have the ability to pay for your tenant representation broker under your own arrangement (flat fee, hourly, percentage), in which you can use this leverage during your negotiations. Typically a commission is split between a landlord’s representative and a tenant representative. The only problem is that most landlord representatives are compensated for the entire fee, so having the tenant rep will actually cost you nothing.
10. Lease Options
Renewal Options, Termination Options, and Expansion Options all should be negotiated. These options provide you with the most flexibility and control of your office lease. Our tenant representation team is skilled in the negotiation of options. Believe us when we say, you cannot read this stuff in a book.