Market Overview

The second quarter of 2010 delivered to us the April 20, 2010 oil spill in the Gulf of Mexico, resulting from the explosion of the Deepwater Horizon rig operated by B.P. We begin the third quarter with the leak, which is approximately 5,000 feet below the surface, still polluting Gulf waters and oil impacts still occurring along Gulf Coast beaches.

It is difficult to fully address the impact upon market values at this time, but the early signs are that tourism is being significantly impacted. Hotel owners at the beaches report exceptional declines in occupancy. Conversely, some of the economy style motels have reported upsurges in occupancy, due to an influx of workers that are assisting with the cleanup. But we’ve also heard a lot in the way of complaints from restaurants, gift shops, and recreational operators out at the beach. It isn’t difficult to expect a significant impact to the local economy if tourism is affected drastically.

I spent one afternoon in phone conversations with MAI Appraiser’s in Alaska who were involved in making diminution in value appraisals resulting form the Exxon Valdez Oil Spill that occurred in Prince William Sound on March 24, 1989. In that accident, the Exxon Valdez oil taker spilled around 11 million gallons of crude. Alaskan MAI’s report that much litigation occurred, often lasting ten years or more; and that diminution in value appraisals were widely the basis for compensation. Some mentioned, however, that the actual impacts never fully matched the fear levels that existed immediately after the spill. The differences for us, though, are that we are much more urbanized, have many more affected parcels, and are much more dependent upon tourism and the micro-economies spun off by tourism. We will continue to monitor the market closely in anticipation of reporting observances concerning the extent of impacts.

We began the 2nd quarter with some encouraging economic signs in April/May, with advances in retail sales, home sales, employment, and a general broadening of the recovery. It was generally thought that the economy was beginning to accelerate. However, things have started to wane again in June. The general expectation is that it could now take years before the job market can fully rebound and the recovery is going to remain muted for quite some time because things are moving very slowly. Locally, this is clearly exacerbated by the uncertainty associated with the Gulf oil spill. People are simply delaying purchase decisions until they can foresee some sort of resolution of the crisis. The weight of the supply from foreclosures and short sale activity is not helping.

It isn’t realistic to expect anything other than lackluster or declining performance in the real estate market over coming quarters as demand continues to be impacted by the oil crisis. Even the speculators who were beginning to enter the market for particularly low purchase opportunities now appear thwarted by current market uncertainty and risk.

Capitalization rates have continued to creep upward since 2006, fueled by continued market uncertainty. Consumer inflation remains very low, even perhaps negative in some cases, and, at least for the time being, the Fed has kept interest rates low. The high vacancy levels we’ve been seeing over past quarters are not abating. Even under the most optimistic standards, the commercial real estate market will remain very fragile for quite some time. New construction is nearly at a halt.

Will the gloom and doom ever end? That seems to be the question as we enter hurricane season. Before the end of the third quarter, B.P.’s relief well should be in place to prevent further contamination of Gulf waters. Some economic boost will also come as a result of clean up activities and labor associated with returning our beaches to their norm. Indeed, as we start the third quarter, beach goers report beautiful conditions at Navarre and other locations along the Gulf.

The multi-family apartment market appears to be the most stable of all the submarkets we analyze. Multifamily prices have retained their values better than other submarkets and occupancies are improving.

Clearly, the current turbulent environment calls for extremely cautious navigation, but somewhere up ahead, more productive times await.

MARKET OVERVIEW......by R. Shawn Brantley, MAI, CCIM SECOND QUARTER - 2010