Monday, October 10, 2005

Everything from Coffee to Tissues…

Office Vacancies Hit 3 ½-Year Low; Rents Rise

Vacancies in the nation's office market fell to their lowest level in 3½ years in the third quarter while rents rose, a new survey said….

Effective rents -- the amount of money a landlord takes in after factoring in concessions to tenants -- rose for the third-straight quarter, heading up 0.8% to $20.41 a square foot from $20.24 in the second quarter. That is doubly good for office owners because asking rents went up just 0.6% in the quarter. That means landlords are dropping the concessions, like free months of rent, that they have used to lure tenants for the last four years.

So reports today’s Wall Street Journal, and to the facts it contains I can testify, based on the following excerpts from a letter, just received, from my office manager:

Some of you have had no increase in rent or service charges for three or four years… As I look ahead, I must candidly advise that we will begin implementing periodic rent and service charge increase to offset rapidly increasing expenses in each of the following areas:

1. Base Rent: Our rent to the landlord increases periodically….

2. Building Expenses and Real Estate Taxes: The building’s operating expenses (including electricity) and property taxes have risen rapidly and are likely to increase further…..

3. Healthcare Costs: Personnel costs are now much higher, largely due to increases in healthcare costs….

4. Consumables: Everything from coffee to tissues is more expensive today.

These trends should not surprise anyone…. My plan is to establish a pattern of reasonable periodic increases to stay ahead of rising costs.

I have no complaints: our office manager is both personally a very nice man, and also a very fair and responsive businessman. The letter is, as he himself is, straightforward and plainspoken.

Consequently, it is hard to argue with, so I will, of course, pay the “periodic rent and service charge” increases.

There is no arguing the fact that I have not had to pay such increases in the last few years, nor is there a debate about the rising real estate taxes, higher healthcare costs, and even the price of coffee.

My only argument is in that last paragraph—“These trends should not surprise anyone.”

Surely there is a long bond holder out there who hasn’t yet gotten the memo.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


Peter said...

The Fed uses govt offices, but it seems they've gotten the memo, too.

But I wonder what one should make of the recent increased amount of hawkishness coming from the Fed - comments from Fisher and Hoenig.

Was the Fed stupid before and is just waking up? Unlikely.

Is this all part of the Greenspan sucesssion drama? Partly -- as people start to try and dictate the stance of the Fed post-Maestro.

Or is it that they knew they couldn't splurge forever and now they see their end game coming undone and are trying to save face or do something? Most likely.

Aaron Koral said...

Jeff: A couple of comments...

A) Seems like residential multi-family housing rents (i.e., apartments) are also firming. The rent increases in residential housing are firming due to lower vacancy rates over the past 12 months, as well as a lower supply of apartment complexes, as builders make conversions from rentals to condo units (I got this data from the National Apartment Association).

I would think that state and local taxes, as well as energy (read: gas and electric bills) prices are also playing an important part in the rise of apartment rents. Apartment owners are probably doing the happy dance as well because they too can drop concessions like first and last month's rent free to lure tenants from considering buying a house.

B) Long bond holders must have a different set of expectations about future interest rates and the rate of inflation than long bond sellers do.

If investors expect decreasing inflation (i.e., the long bond holders), then that can only mean that those investors anticipate lower inflation in the future. They then require lower inflation premiums, causing long-term Treasury securities to have lower interest rates than short term securities. An inverted term structure would be the result of such expectations.

If the expectations of the long bond holders are wrong, sellers of the 30 year Treasury should have a field day as the Treasury market goes into turmoil. If the expectations of the long bond holders are right, however, then investors in the 30 year bond could be in for the rally of a life time (I could be wrong on all counts though....)

RichL said...

Perhaps he should have written the memo in Chinese or Japanese?

Prudent Investor said...

Yes, I also disagree with "these trends should not surprise anyone..." When the main street has finally awoken to the "inflationary" trend, it is typically the beginning of the end.

The missing memo from the long bond investor may be trying to tell us something....something in the economy WILL BE very wrong 6-12 months down the road. The last rally from the low 3.8% to the 10 year has predicted all these "inflationary" pressure which only is now entrenched in the public mindset.

So what is the long bond indicating? DEFLATIONARY pressure is upon us and inflationary pressure may have been PEAKING.

Like I said earlier, YIELD CURVE INVERSIONS is closer to reality than ever.

bsilly0 said...

The long bond is indicating 2.7 % inflation, and 2 % real returns for the next 30 years.

At least that's what comparing 30 year TIPs to 30 year treasury tells us.