Total commercial property transactions jumped after last month’s drop; multifamily transactions vaulted even as all other sectors declined. Buyer appetite showed overall strength with prices at or near postrecession highs, CMBS issuance close to recent monthly highs, and cap rates remaining low and stable. Permits and starts of all types of housing continue to climb. Prices of new single-family homes are just shy of all-time highs and condominium price increases were strong. The stall in employment growth and decline in unemployment raise many questions.
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The top ten trends in this month’s Barometer are:
- Employment growth in March slowed dramatically; the unemployment rate inched down only because of a sharp decline in the workforce.
- Total retail sales were up, though due, in large part, to a spike in gasoline prices. Inflation grew at its highest rate in almost four years due to the rise in energy prices. Consumer confidence dropped sharply.
- Private construction value was up, almost entirely due to an increase in residential construction. The manufacturing sector expanded for the fourth-straight month; S&P 500 returns were strong.
- Commercial property prices are at or near four-year highs, though still well below their prerecession peak, according to two repeat-sales indices. According to an index of REIT portfolio values, prices now surpass their prerecession peak. Cap rates remain low and stable.
- Total commercial property transaction volume recovered from the prior month’s dramatic drop, as transactions in the apartment sectors vaulted. Transaction volumes in all other sectors declined.
- CMBS issuance was down in March, but volume was still among the four highest monthly volumes in more than five years; all four of these months have occurred since November 2012. Spreads tightened a bit.
- Total REIT returns were well above their long-term average and positive in all sectors, with the lodging/resort sector the strongest.
- Multifamily permits have now been increasing fairly consistently for 3.5 years and starts for two years. Condominium sales volume was at a 5.5-year high and price increases were strong.
- Single-family permits and starts continue their almost two-year steady climb, now reaching levels seen in 1982. Prices are just shy of all-time highs; sales fell.
- Prices of existing single-family homes showed little change, according to repeat-sales indices, while prices of unpaired transactions increased slightly, but all are below prerecession highs; sales fell.
Overall, 65 percent of the key indicators in the Barometer have improved from the previous month’s Barometer; compared with a year ago, 87 percent have improved.
(For annual projections of key Barometer indicators, see the ULI Real Estate Consensus Forecast).
Monthly employment growth in March stalled while the unemployment rate inched down only because of a sharp decline in the workforce. Consumer confidence dropped sharply. The rise in retail was buoyed by a sharp increase in the price of gas, and the rise in the Consumer Price Index was due to a spike in gas and energy prices. Still, the manufacturing sector expanded for the fourth-straight month and the S&P 500 returns were strong. Fourth-quarter GDP growth was revised slightly upwards but still reflects minimal change.
Net job growth
in March of 88,000 jobs, a dramatic drop from February’s job growth of 268,000, was made up of 95,000 new private sector jobs and the loss of 7,000 public sector jobs. The country has 2.9 million fewer jobs than it did five years ago; at March’s growth rate, it would take almost three years to regain just those jobs. The greatest job gains in March were in professional and business services, health care, and construction; the greatest declines were in retail and the U.S. Postal Service. The overall unemployment rate in March was 7.6 percent, down from 7.7 percent in February, and the lowest in more than four years. A significant decline in the size of the labor force contributed to this decline in the unemployment rate.
Fourth-quarter GDP growth was 0.4 percent, revised from 0.1 in the third estimate, still a sharp slowdown from the third-quarter growth of 3.1 percent. The increase in the fourth quarter primarily reflects positive contributions from personal consumption expenditures, nonresidential fixed investment (both equipment/software and structures), and residential fixed investment, offset by negative contributions from private inventory investment, federal government spending (virtually all national defense), exports, and state and local governments. Imports, which are a subtraction in the calculation of GDP, decreased.
The Consumer Confidence Index dropped sharply in March, declining to 59.7 from 68 in February. Total retail sales in February increased by 1.1 percent, influenced by a sharp rise in gasoline prices, as well as strong increases in motor vehicle, building material/garden equipment sales, and grocery stores. Sales declined in home furnishings, department stores, sporting goods and electronics. Total retail sales of $421.4 billion are 4.6 percent higher than those of a year earlier.
The value of private construction rose 1.3 percent in February after a dip in January and is up almost 13 percent from a year ago. February’s increase was almost entirely in residential construction. Public construction put in place inched up but is down -1.5 percent from a year earlier. February’s total construction value of $885.1 billion is down 27 percent from the prerecession high in March 2006, with private construction down 36 percent.
Inflation, as measured by the Consumer Price Index, was up 0.7 percent in February. This was primarily due to a sharp increase in the gasoline and fuel oil price indices. Over the past 12 months, inflation was 2 percent.
Monthly returns for the S&P 500 were a strong 3.8 percent in March. Year-over-year returns were at 14 percent.
The Purchasing Managers’ Index registered 51.3 in March, a decrease from 54.2 in February, but indicating expansion in the manufacturing sector for the fourth-straight month.
Transaction volumes were dominated by trading in the apartment sector. Commercial property prices remained at or near four-year highs, though still well below their prerecession peak, according to two repeat-sales indices. According to an index of REIT portfolio values, prices now surpass their previous peak. Cap rates remain low and stable. Total REIT returns exceeded their long-term average, with the lodging/resort sector the strongest. CMBS issuance was down in March, but it is still one of the highest monthly volumes during those five years; spreads widened a bit.
Commercial property sales volumes (excluding land and hotels) recovered from January’s dramatic drop following December’s end-of-the-year spike, rising from $13.1 billion to $27.7 billion, according to Real Capital Analytics (RCA). Other than the one spike, February’s volume was the highest monthly volume since December 2011. This recovery was due almost entirely to transactions in the apartment sector. Apartment transactions increased by more 400 percent, as large portfolios traded hands, and made up 70 percent of all transactions; transactions in all other sectors declined.
According to RCA, the ten most active sales markets in the past 12 months are, in descending order: Manhattan, Los Angeles, Chicago, Seattle, San Francisco, Dallas, Houston, Boston, Atlanta, and the Virginia suburbs of Washington, D.C. More than $6.9 billion in transactions have been recorded in each of these cities since March 1, 2012.
Moody’s/RCA Commercial Property Price Index was down just 0.1 percent in January from December’s four-year high. (This is a same-property index based on all U.S. transactions exceeding $2.5 million.) Values are 6.5 percent higher than a year ago, but still down 20 percent from the December 2007 peak.
The value-weighted composite CoStar Commercial Repeat-Sale Index increased 0.7 percent and is at the highest level in four years. (The index is based on a repeat-sales methodology that tracks transactions exceeding $100,000 and includes land sales.) Values are 4.8 percent higher than a year ago, but are still down about 16 percent from the peak value in September 2007.
The GSA Commercial Property Price Index, based on estimates of private market values for REIT portfolios, increased 1.7 percent in March to its highest level in the 15 years covered by the index (since December 1997). Values are 8.4 percent higher than a year ago.
As reported in last month’s Barometer, the NCREIF Property Index turned in a positive fourth quarter with total returns of 2.5 percent, sustaining the consistently positive returns of the last three years, but at somewhat lower rates in 2012 than in 2010 and 2011. The capital appreciation component was 1.1 percent for the quarter. Total 12-month returns are now 10.5 percent. Returns for the quarter by property sector were all between 2.2 and 2.8 percent, with the exception of 3 percent returns in the retail sector.
Capitalization rates, as reported by RCA, were unchanged at 6.83 percent in February. NCREIF cap rates remained compressed in the fourth quarter, essentially stable at 5.87 percent, also down just 1 basis point.
Total equity REIT returns were strong in March at 3 percent and positive in all sectors, ranging from 6.2 percent for lodging/resorts to 1.2 percent for office. One-year total returns as of March stood at 15.3 percent, with one-year returns reaching 18.5 percent for the industrial sector and 18.2 percent for the retail sector. Apartments had the lowest one-year returns at -1.3 percent.
CMBS issuance during March was $6.99 billion, according to Commercial Mortgage Alert, down 5 percent from February, but still among the four highest monthly volumes in more than five years. The four highest monthly volumes have occurred since November 2012. The spread over swaps for ten-year AAA new CMBS issuance was 78 basis points in the first week of April, down a notch from 81 basis points from the first week of the previous month. The spread is well below the 136-basis-point spread of a year ago, signaling strong appetite for CMBS securities. According to Trepp LLC, CMBS delinquency rates edged up after four-straight months of decline and are now at 9.5 percent.
Bank real estate loan delinquency rates continued to fall in the fourth quarter. Commercial and multifamily mortgage delinquency rates are now 2.85 percent and 1.56 percent, respectively. The multifamily delinquency rate is now below the long-term historical average (since 1991). Construction and development loans have the highest delinquency rate at 8.34 percent, substantially above the quarterly historical average (since 1991) of 5.4 percent.
Single-family permits and starts continued their almost two-year steady climb, but the decline that started eight years ago was so steep that current monthly levels are in line with prerecession levels seen in 1982. Prices rose to just shy of all-time highs; sales fell. Prices of existing single-family homes showed little change, according to repeat sales indices, while prices of unpaired transactions increased slightly, but are all below prerecession highs; sales fell. Multifamily permits have now been increasing fairly consistently for 3.5 years and starts for two years. Condominium sales volume was at a 5.5-year high and price increases were strong.
Existing single-family home prices increased—albeit just barely—according to the S&P/Case-Shiller Index (which tracks repeat sales in 20 cities), with a 0.13 percent shift in January. Prices are now 8.1 percent above those of one year ago, though still significantly lower—29 percent—than their peak in July 2006. The Federal Housing Finance Agency House Price Index (HPI) for existing single-family home prices (tracking repeat sales in the entire country) slipped 0.22 percent in January, but prices remain up 6.5 percent from a year ago. Still, the index is 16 percent lower than its peak in June 2007.
Existing single-family home prices (based on individual, unpaired transactions for the entire country), as tracked by the National Association of Realtors (NAR), which had dropped 5.1 percent in January, increased 1.6 percent in February to $173,800. Prices are almost 14 percent higher than one year ago, though 22 percent below the peak in 2006.
New single-family home prices, which had dropped 8 percent in January, increased 3 percent in February to $246,800, just shy of the prerecession peak. Prices are almost 3 percent higher than one year ago.
Single-family building permits were up 1.9 percent in February (an annual rate based on a three-month moving average) to 586,000. The number of permits has increased each of the past 22 months and is at its highest level in 4.5 years (since July 2008). Still, January’s permit numbers are almost 70 percent below the prerecession high witnessed in November 2005 and almost 40 percent below the long-term monthly average (since 1970).
Single-family housing starts
increased almost 3 percent in February (on a three-month moving average) to 617,000 and are now at their highest level in 4.5 years (since August 2008); however, starts are 65 percent below the prerecession high seen in November 2005.
Sales of new single-family homes (seasonally adjusted) fell 5 percent to 411,000 in February from January’s 4.5- year high (since July 2008). Sales are up 12 percent over February 2012 but are 70 percent below the prerecession high in July 2005. Inventory increased by 1 percent but is still just above the record low (since record keeping began in 1963) reached last July.
Sales of existing single-family homes (seasonally adjusted) shifted down slightly, by 0.2 percent, in February to 4.36 million. January’s monthly sales were 31 percent below the prerecession high witnessed in September 2005. Inventory increased by 6 percent to 1.68 million, from January’s 13-year low. The forward-looking NAR Index of Pending Sales (of existing single-family homes, condominiums, and co-ops) shifted slightly, down -0.4 percent from the previous month’s three-year high.
Multifamily building permits increased 1.3 percent to 305,000 in February (based on a three-month moving average), the highest monthly level since August 2008. Multifamily housing starts were up almost 3 percent to the highest monthly level since September 2008.
The rent index for apartments, calculated quarterly by CBRE, was up 0.8 percent in the fourth quarter of 2012 to $1,312, which is 4.2 percent higher than a year earlier. Apartment vacancy rates, reported quarterly by CBRE, increased to 5 percent in the fourth quarter, reversing an almost three-year slide.
Existing-condo sales reached 620,000 in February, up 8 percent from January, to the highest monthly sales volume in 5.5 years. Inventory jumped 33 percent in February from the previous month’s 11.5-year low; supply increased to 4.9 months.
New foreclosure filings—default notices, scheduled auctions, and bank repossessions—increased 2 percent in March to a total of 154,281, according to RealtyTrac; the prior month’s total was the lowest since April 2007. “At a high level, the U.S. foreclosure inferno has been effectively contained and should be reduced to a slow burn in the next two years,” RealtyTrac notes. “But dangerous foreclosure flare-ups are still popping up in states where foreclosures have been delayed by a lengthy court process or by new legislation making it more difficult to foreclose outside of the court system.”
Home mortgage rates (30-year fixed) hardly changed in March, moving to 3.57 percent from 3.52 percent in February. Rates are just barely creeping up from December’s rate of 3.35, the lowest monthly rate since record keeping began in 1971.
The industrial sector gathered steam as completions and absorption jumped to 4-year and 6-year highs, respectively; rents, however, remain close to a 14-year low. Office completions remain low and absorption is steady at a moderate level; rents continue to inch up. Retail completions, while slightly up, remain low, but absorption doubled to a 5-year high; rents reversed their 4.5-year slide, albeit just barely. Fourth-quarter completions in the apartment sector soared past the long-term quarterly average; rents ticked up to a new all-time high. Hotel RevPAR showed healthy improvement from a year earlier.
Office vacancy rates are down to 15.4 percent in the fourth quarter of 2012 from 15.6 percent in the third quarter, according to CBRE, continuing the slow decline of the last two years. Rents were up 1.4 percent in the fourth quarter, the eighth-straight quarter of rent growth, and are up 3.8 percent from a year earlier. Net absorption was 8.4 million square feet, almost 75 percent of the long-term average (since 1988), while completions remain low at 21 percent of the long-term average (since 1980).
Retail availability rates edged down to 12.8 percent in the fourth quarter from 12.9 percent in the third quarter, according to CBRE; this is the third-straight month of decline (albeit at a slow pace) and the second month in three years below 13 percent. Rents reversed their 4.5-year slide in the fourth quarter and are now just 0.2 percent off from a year earlier. Though just 70 percent of the long-term average (since 1989), net absorption was the highest quarterly absorption in 5 years at 6.2 million square feet; completions stood at less than 20 percent of the long-term average (since 1980).
Industrial availability rates picked up the pace of improvement and dropped to 12.8 percent in the fourth quarter from 13.1 percent in the third quarter. Availability rates, improving slowly over the last nine quarters, are now down 70 basis points from the same quarter a year earlier. Rents slipped after three straight quarters of growth and are only 1.2 percent above the 14-year low reached in the last quarter of 2011. Net absorption was strong at 55.9 million square feet, the highest quarterly absorption rate in more than six years and almost double the long-term average (since 1980); completions stood at about 40 percent of the long-term average (since 1980).
Apartment vacancy rates increased to 5 percent in the fourth quarter of 2012, reversing an almost three-year slide. Rents continued their almost three-year growth streak, but, at an increase of 0.8 percent, this is the fourth quarter of a consistently slowing rate of growth. Rents are now 4.2 percent higher than a year earlier. Absorption was negative, reflecting a combination of an expected seasonal dip in leasing activity and a high level of completions. Completions jumped 15 percent in the fourth quarter to 40,534 units, to a three-year high. Completions are at 97 percent of the long-term average (since 1994).
Hotel occupancy rates stood at 56.6 percent in the fourth quarter of 2012, up from 55.3 percent in the same quarter a year earlier, according to Smith Travel Research, while the RevPAR index was up 6.5 percent from a year earlier.