Since mid-September the visibility into the credit markets and the outlook for the global economy has deteriorated dramatically, Moghadam said, admittedly stating the obvious. Decision making on many fronts has ceased and the capital markets are by and large in a frozen state, he added.

"Capital markets should remain locked up through the first half of next year and debt will continue to be largely unavailable at reasonable terms," Moghadam said. "This all results in less predictability in earnings particularly on the gain side of the business. We're planning our business for the downside. We intend to be very selective with our capital deployment decisions starting projects only where the market demand is sound and where profit expectations justify the risks with an adequate margin of safety."

When asked by an analyst to discuss what type of lenders are still out there and exactly what their costs are, Moghadam's CFO Thomas S. Olinger had this to say: "The US [market] has held up better at least in our situation [because of] the life company lenders, that's really the story for us in the US," he said. "In Europe and Japan it has deteriorated more just from a capacity standpoint. That's really the theme."

Spreads have moved out clearly, Olinger said, to approximately 325 basis points over the five- and seven-year Treasury in the US and 225 basis points in Europe and Japan. "So in context in the US today you're looking at an all in of around seven [percent]," Olinger said. "I would say that's a little under seven in Europe excluding the UK and around four to four and a half, more like five in Japan."

Moghadam added that since " the Lehman weekend or the AIG week" he has heard from many lenders, particularly banks, who have put their lending programs on hold for the balance of 2008 as they assess what kind of capacity they might have available in 2009.

"So it's really much more a question of capacity than rate," Moghadam said. "I think we've seen since then a lot of action obviously around the world to encourage lending and to build up these balance sheets, but we haven't seen those policy movements obviously translate into any additional lending just yet because I don't think those capital floats have taken place."

Speaking specifically about the industrial market, Moghadam said net absorption for the industrial market nationally was negative to the tune of eight million sf in the third quarter. "Ironically, this was the best quarter of the year," he said. "We don't think you should read too much into that strength because the fiscal stimulus that kept the US economy going gave it more strength than it would have otherwise in its absence."

Moghadam is predicting that absorption will slow further in the fourth quarter and close out the year with negative 75 million sf in the aggregate. Negative net absorption during the last downturn, 2001 and 2002, totaled 200 million sf, he said.

In response, the pipeline of projects under construction dropped to 100 million sf, a 26% decrease from the second quarter. "This is the lowest pipeline of new supply since the first quarter of 2005, when supply was starting to accelerate," he said. "The 2008 forecast for US supply at roughly 160 million sf remains significantly below the peak production levels of over 250 million sf set before the last downturn in 2001."

Based on external and internal valuations, Moghadam said cap rates for the best properties have increased by about 50 basis points since the peak of the market in 2007. Transaction volume "is low to nonexistent" but appraisers are adjusting down values by these amounts ahead of transactional evidence, he said.

"Operating fundamentals particularly in the US continue to slide although we expect our portfolio to outperform the market by a wider margin than normal times," Moghadam said. "The spread in cap rates between primary and secondary markets will widen further with cap rates for the best properties increasing about another 25 to 50 basis points."The increase in secondary market cap rates appears to be double or triple the change in prime markets, Moghadam added. "We're fortunate to have no exposure to those markets," he said. "While the private developers have retreated from new construction there are limited signs of distress for quality well-located industrial assets in the good markets. Relative to our platform our operating fundamentals continue to hold and we are in better shape than in previous downturns."

AMB's operating portfolio of approximately 158.4 million sf in 49 markets within 15 countries was 95.4% occupied at Sept. 30, up 20 basis points from June 30, exceeding the national market average by 610 basis points and 100 basis points higher than the company's historical average spread. During the quarter the company leased more than 5.1 million sf with a very healthy quarterly retention rate of over 78%. The third quarter marked its ninth consecutive quarter of rent increases on rollovers with an increase of 4.8%.

Cash-basis same store net operating income, without the effects of lease termination fees, increased 3.5% in the third quarter and 4.9% in the first nine months of 2008, over the same periods in 2007. For the trailing four quarters ending September 30, average rent change on renewals and rollovers in AMB's operating portfolio increased 4.1%, following an average increase of 4.3% for the trailing four quarters ending June 30.

Instant Insights /

AMB's Moghadam Talks Market Conditions

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