The top 10 trends in this month’s Barometer highlight muted growth in the economy, mixed signals in the capital markets, and a housing market that continues on a low simmer. Still, 75 percent of the key indicators in the Barometer are better than a year ago, 1 percent remains the same, and only 25 percent are worse. (For annual projections of key Barometer indicators, see the ULI Real Estate Consensus Forecast).
Note: More commentary and data can be found throughout the tabs and in the accompanying tables.
In those top 10 monthly trends:
- The economy added 80,000 jobs in June—disheartening not only because it is insufficient relative to the number of unemployed workers, but also because it is the third-straight month of low-level growth coming on the heels of six months of fairly strong growth. At June’s pace, it would take five years to regain the almost 5 million jobs lost in the past four and a half years. The unemployment rate remained unchanged.
- GDP growth in the first quarter of 2012, already estimated to be lower than the fourth-quarter figure, was unchanged in the final estimate. GDP growth is now substantially below its 40-year quarterly average.
- Consumer confidence fell and retail sales declined, although when adjusted for gasoline sales, sales showed weak growth. The manufacturing sector showed signs of contracting.
- Private construction was a slightly bright spot in the economy as it continued to inch up. Still, total construction is off by one-third from its pre-recession high.
- Commercial property transaction volumes rose in May, continuing the zigzag pattern of the past year and a half. Prices slipped according to repeat-sales indices.
- REIT returns were positive in all sectors in June.
- CMBS activity slid from the highest volume in 16 months, and CMBS delinquency rates rose to a record high.
- The multifamily housing construction industry maintained some of its recent momentum with permits at three-and-a-half-year highs, but starts fell. Permits remain at about 66 percent of their long-term monthly averages (since 1970) and starts are at 60 percent.
- In the single-family housing construction industry, permits are at a two-year high, and starts approached a 21-month high. These figures are only approaching 50 percent of their long-term monthly averages (since 1970). Sales of new single-family homes increased but are still near 50-year lows, and new home prices declined. Prices of existing homes increased.
- Total foreclosure filings jumped in May, although a higher percentage than usual of these new foreclosure starts is expected to end up as short sales or auction sales. Such sales, while still a discounted sale, are typically priced higher than a sale after a bank repossession.
Most of the recent news points to an economy that has lost steam (but has not stalled out) and suggests increased vulnerability to shocks, should they occur, from the Eurozone and reckless congressional behavior. Low-level job growth for the third-straight month, low GDP growth, weak retail sales, a decline in consumer confidence, and a contracting manufacturing industry all stand in sharp contrast to the economic news that led to prudent optimism earlier this year. Still, the value of private construction inched up and S&P returns were positive.
Net job growth
in June of 80,000 jobs was made up of 84,000 private sector jobs gained and the loss of 4,000 public sector jobs. The country has 4.9 million fewer jobs than it did almost four and a half years ago. At June’s growth rate, it would take five years to regain just those 4.9 million jobs—a timeline that does not address the additional employment needs of a growing population. Private sector job gains in June were greatest in temporary help services and professional and technical services, but were also strong in food services, health care, and leisure and hospitality. The overall unemployment rate in June was unchanged from May at 8.2 percent after having dipped slightly in April to 8.1 percent, the lowest rate in three years.
Estimated GDP growth for the first quarter of 2012 remained at 1.9 percent in the most recent estimate. This is substantially below the fourth-quarter 2011 rate of 3.0 percent and the long-term quarterly average (since 1970) of 2.8 percent. Factors contributing to first-quarter growth were personal consumption expenditures (primarily goods), exports, residential fixed investment, nonresidential fixed investment, and private inventory investment. These were partially offset by declines in federal government spending and state and local government spending. Imports, which are a subtraction in the GDP, rose.
The Consumer Confidence Index fell 2.4 points in June to 62 after a drop of 4.3 points in May. It is now at 71 percent of the pre-recession level in January 2008 of 87.3. Total retail sales in May were down 0.2 percent, although they were up a weak 0.1 percent when gasoline sales are excluded. This small adjusted growth was the result primarily of higher sales of clothing, electronics, motor vehicles and parts, and home furnishings, but declines in all other categories. Retail sales of $404.6 billion are 5.3 percent higher than those of a year ago but exceed the pre-recession peak of $378.4 billion (in November 2007) by only 6.9 percent.
The value of private construction continued to edge up in May. Public construction put in place decreased in May for the sixth-straight month. May’s total construction value of $830.0 billion is down 32 percent from the pre-recession high in March 2006.
Inflation, as measured by the Consumer Price Index, fell slightly in May due to increases in all non-energy items being offset by significant declines in all energy items. For the past 12 months, the CPI has risen 1.7 percent.
Monthly S&P 500 returns were positive in June—up 4.1 percent—a welcome relief from two months of decline. Year-over-year returns also recovered from May’s negative 12-month returns and were positive at 5.5 percent.
The Purchasing Managers’ Index (PMI) Index declined to 49.7, a level that indicates contraction in the manufacturing sector, according to the Institute for Supply Management. This is the first time the manufacturing sector has contracted since July 2009.
Capital markets were mixed: commercial property transaction volumes rose and prices slipped according to repeat-sales indices; REIT monthly returns were positive; CMBS issuance declined and delinquency rates rose to a new high.
Capitalization rate trends showed continued strength in buyer appetite for commercial properties. Capitalization rates, as reported by Real Capital Analytics (RCA), were 6.69 percent in May, down from 6.79 percent in April. As reported by NCREIF, capitalization rates fell from 6.03 percent in the fourth quarter of 2011 to 5.97 percent in the first quarter of 2012. First-quarter cap rates are close to their lowest levels since the third quarter of 2008.
Commercial property sales volumes (excluding land and hotels) increased 14 percent to $15.35 billion in May, according to RCA, continuing the zigzag pattern seen over the past one and a half years. The apartments sector was the most active with 36 percent of the transaction volume, followed by office (26 percent), retail (22 percent), and industrial (16 percent).
The ten most active sales markets in the past 12 months accounted for 41 percent of all transactions, slightly up from last month. They were, in descending order, Manhattan, Los Angeles, Chicago, Boston, Houston, Dallas, San Francisco, Seattle, the Virginia suburbs of Washington, D.C., and Atlanta, according to RCA. Over $6 billion in transactions have been recorded in each of these cities since June 1, 2011.
The Moody’s/RCA Commercial Property Price Index inched down 0.6 percent in April, the second-straight month of decline. (This is a same-property index based on all U.S. transactions over $2.5 million and reported monthly as a three-month moving average, with a two-month lag.) Values are now down 23 percent from the peak value in December 2007 and up 9.1 percent from a year ago.
The new value-weighted composite CoStar Commercial Repeat-Sale Index declined 2.2 percent in April. (These indices are based on a repeat-sales methodology that tracks transactions over $100,000 and includes land sales, with a two-month lag.) Values are down 24 percent from the peak value in June 2007 but up 6.5 percent from a year earlier.
The GSA Commercial Property Price Index, based on estimates of private market values for REIT portfolios, was unchanged in June. Over the past 12 months, the GSA Price Index has increased just 4.6 percent, although it is down just 6 percent from its peak value in August 2007.
As reported in last month’s Barometer, the NCREIF Property Index turned in a positive first quarter of 2012 with total returns of 2.6 percent, sustaining the positive returns that began in the first quarter of 2010. The capital appreciation component was 1.2 percent for the quarter. Total 12-month returns are now 13.4 percent. Returns for the quarter by property sector range from 1.5 percent for the lodging/resorts sector to 2.8 percent for both retail and apartments.
REIT returns were positive in June in all sectors. Returns for individual sectors ranged from the office and retail sectors at 6.5 percent and 6.3 percent, respectively, to industrial at 5.7 percent, lodging/resorts at 4.5 percent, and apartments at 2.1 percent. One-year total returns as of June stood at 12.5 percent.
slid to $4.23 billion in June from $4.75 billion in May, according to Commercial Mortgage Alert; May’s volume was the highest monthly volume in 16 months. According to Trepp LLC, CMBS delinquency rates increased to a record high of 10.16 percent in June from 10.04 percent in May as more five-year loans that were securitized in 2007 reached their maturity dates.
Bank real estate loan delinquency rates continued to fall in the first quarter of 2012, as reported in last month’s Barometer. Commercial and multifamily mortgage delinquency rates are now 3.67 percent and 2.36 percent, respectively. Construction and development loans have the highest delinquency rate at 12.52 percent, substantially above the quarterly historical average (since 1991) of 5.2 percent.
Multifamily monthly permits are at a high not seen in over three and a half years, although starts fell. Single-family monthly permits are at a two-year high, permits are near a 21-month high, and sales are up substantially over a year ago. Even at these recent highs, activity in both the multifamily and single-family construction industries remains near historically low levels. Sales of existing single-family homes dipped, but the National Association of Realtors (NAR) Index of Pending Sales jumped. Existing home prices rose, according to all sources, and are higher than one year ago, according to sources that cover the whole country, or just below prices of one year ago, according to a source that focuses on 20 of the largest cities. Prices from all sources remain substantially off their pre-recession peak.
After six straight months of decline and then a month of no change, the S&P/Case-Shiller Index for existing home prices increased a relatively healthy 1.3 percent in April, and prices are now down just 1.9 percent from one year ago. Still, prices remain 34 percent below their peak in July 2006. (This index, a composite of repeat transactions in 20 cities, is reported monthly as a three-month moving average, with a two-month lag.) The Federal Housing Finance Agency House Price Index (HPI), which experienced a similar but more moderate multiyear slide, increased for the third-straight month, climbing 1.7 percent in April; it is now up 3 percent from one year ago, although down 18 percent from its peak in June 2007. (The HPI covers repeat transactions in the entire country and is reported monthly with a two-month lag.) NAR data (monitoring individual, unpaired transactions for the entire country) showed a substantial price increase of 5.1 percent in May. NAR’s data for April also showed strong growth at 5.5 percent. Median prices for existing single-family homes in May stood at $182,900, up almost 8 percent over one year ago, although still 18 percent below the peak in 2006.
Median prices for new single-family homes shifted slightly downward for the third-straight month with a decline of 0.6 percent in May to $234,500. Prices have seesawed over the past year; despite these recent small declines, they are up 5.6 percent over May 2011 and down just 5.4 percent from the peak in 2007.
Single-family building permits were up 1.1 percent in May (an annual rate based on a three-month moving average) to 478,000, the highest monthly permit volume in 24 months. Still, May’s permit numbers are 73 percent below the pre-recession high in November 2005. Single-family starts increased by 3 percent in May (on a three-month moving average) to 499,000 annualized—almost back to February’s 21-month high after a two-month dip; they are now 72 percent below the pre-recession high in November 2005.
Sales of new single-family homes
increased 7.6 percent in May, more than reversing the declines of the previous two months and putting them almost 20 percent higher than a year earlier; still, monthly sales volume for the past 24 months remains among the lowest seen since record keeping began in 1963. Sales are 73 percent below the pre-recession high in July 2005. Inventory in May increased by less than 1 percent from March and April (both of which registered the lowest monthly figure since record keeping began) and was 14 percent below that of a year earlier.
Sales of existing single-family homes (seasonally adjusted) declined 1.0 percent in May to 4.05 million but were 10 percent higher than those of a year earlier. Still, May’s monthly sales were 35 percent below the pre-recession high in September 2005. Inventory increased by 9 percent in May, and supply rose to 6.5 months, although it is still below the long-term average. The forward-looking NAR Index of Pending Sales (of existing single-family homes, condos, and co-ops) jumped 5.6 percent in May back to March’s two-year high—the highest level since the first-time homebuyer credit expired in April 2010.
Multifamily building permits jumped almost 9 percent to 258,000—the highest level in over three and a half years (based on a three-month moving average). Multifamily housing starts fell 9 percent in May to 210,000, down from their highest level in three and a half years. Existing condo sales decreased by 6 percent to 500,000, 4 percent higher than May 2011, but inventory also declined, so supply decreased from 7.2 months to 6.7 months, 11 percent below the long-term average.
Foreclosure filings—default notices, scheduled auctions, and bank repossessions—jumped by 9 percent in May from a month earlier to 205,990, according to RealtyTrac. Although these filings remain down 4 percent from a year earlier, this is the lowest year-over-year decline in one and a half years. RealtyTrac reports: “Based on the rise in pre-foreclosure sales we’ve seen so far this year, a higher percentage of these new foreclosure starts will likely end up as short sales or auction sales to third parties rather than bank repossessions going forward. While pre-foreclosure sales have less of a negative impact on home values than bank-owned sales, they still represent a discounted sale where a distressed homeowner is losing his or her home.”
Home mortgage rates (30-year fixed) fell in June to 3.68 percent from 3.80 percent in May. June’s rate was the lowest monthly rate since record keeping began in 1971.
Apartment rents and hotel revenue per available room (RevPAR) show continued strong growth with apartment rents now surpassing their pre-recession high; rents in the industrial and office sectors are slowly inching up; retail rents are still declining. Office vacancy and retail availability rates are high but stable, industrial availability is high and inching down, and apartment vacancies are low. First-quarter hotel occupancy improved from a year earlier. Net absorption in the office sector was negative and was low by historical standards in the retail sector; net absorption in the apartment and industrial sectors is the strongest, although still down 21 percent and 16 percent from their historical averages, respectively. Completions in all sectors are extremely low by historical standards, though the apartment sector is the strongest at about one-third the long-term average.
Office vacancy rates
stood at 16.0 percent in the first quarter of 2012, unchanged from the fourth quarter of 2011, according to CBRE. Rents crept higher for the fifth-straight quarter and are up 3.1 percent from a year earlier. Net absorption became negative after almost two years of positive growth, while completions remain low at 9 percent of the long-term average (since 1985).
Retail availability rates
stood at 13.1 percent in the first quarter of 2012, registering no change from the fourth quarter of 2011 or the same quarter one year earlier, according to CBRE. Rents continued their four-year slide in the fourth quarter and are off 2.1 percent from a year earlier. Net absorption was down from the fourth quarter but positive for the third-straight month, at 1.02 million square feet; completions were down as well and at 8 percent of the long-term average (since 1980).
Industrial availability rates
stood at 13.4 percent in the first quarter of 2012, continuing their slow but consistent seven-quarter decline; rates are now down 70 basis points from the same quarter a year earlier. Rents edged up but are off 0.4 percent from a year earlier. Net absorption was strong at 24.95 million square feet, although down from the previous quarter; completions were down and only 12 percent of the long-term average (since 1980).
Apartment vacancy rates
edged down to 5.1 percent in the first quarter of 2012 after a very slight bump up in the fourth quarter, and are 80 basis points lower than for the same quarter a year earlier. Rents were up 1.2 percent in the first quarter and are 4.9 percent higher than a year earlier. Completions in the first quarter of 2012 were up almost 2 percent and are at 35 percent of the long-term average (since 1994).
Hotel occupancy rates stood at 56.8 percent in the first quarter of 2012, up from 54.7 percent in the same quarter a year earlier, according to Smith Travel Research, while the RevPAR Index was up 7.9 percent from a year earlier.