Summary

ULI Center for Capital Markets and Real EstateSustained, moderate strength in some of this month’s economic data creates a creditable sense of well-being, while see-sawing continues in the Barometer capital markets data and the weak housing data stay very weak. Overall, 51 percent of key indicators in the Barometer were worse when compared with one year ago, 44 percent were better, and 5 percent were unchanged.

Note: More commentary and data can be found throughout the tabs and in the accompanying tables.

Retail sales were strong in February and the final GDP numbers for Q4 2010 was healthy. Private sector employment finally looks sustainable at significant levels with two consecutive months of strong, broad-based growth now on record. Still, though the unemployment rate continues its descent, long-term unemployment will be a fact of life for many people for several years, and the extent to which the public sector will continue to lose jobs, negatively impacting net job growth, remains an unknown. S&P returns were barely positive; rising food, energy, and gasoline prices drove a rise in the CPI not seen in 21 months; and consumer confidence took a dive.

Capital market activity slowed considerably and most indicators were down, including commercial sales volumes, most price indices, CMBS market issuance, and REIT returns. And CMBS delinquencies were up yet again. Still, March was the second-straight month in which multiborrower CMBS deals were priced.

In the housing sector, single-family housing starts declined in February and remained at historically low levels, and multifamily starts fell considerably after a leap to a two-year high in January. Even with this recent high, multifamily starts are also at historically low levels. Home prices for both new and existing homes are down again. New single-family home sales remain historically low and slipped even lower. Sales of existing single-family homes are a bright spot, and pending sales of all types of existing homes increased slightly after a two-month decline. The number of foreclosures once again declined.

Below is a summary of more than 70 key indicators of the performance of the economy, real estate capital markets, housing, and commercial/multifamily investment property.

Economy


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Private sector employment growth relatively strong, though slightly lower in March than in February, and two consecutive months of broad-based growth suggest that quite possibly rising employment is here to stay. Even at these latest growth levels, however, it would take almost three years to create the number of jobs lost over the past three years. Still, a healthy pace of economic expansion is suggested by the latest GDP estimates. Retail sales were strong, but consumer confidence dipped.

A net increase of 216,000 jobs in March was due to an increase of 230,000 private sector jobs (primarily in health care, professional and technical services, temporary services, food services and drinking places, durable goods manufacturing, and mining) and the loss of 14,000 government jobs (primarily in local government, but also in the U.S. Postal Service). A total of 1.42 million jobs in all sectors have been created since March 2010—only 21 percent of the net total of 7.25 million lost over the past three years.



The unemployment rate
 
continued to move in the right direction, falling from 8.9 percent in February to 8.8 percent in March. March’s unemployment rate is the lowest since April 2009.

The final estimate of fourth-quarter 2010 GDP growth is 3.1 percent, a welcome increase because it now exceeds the long-term quarterly average growth of 2.9 percent. This final revision reversed the disturbing decrease from the first to second estimates.

The Consumer Confidence Index declined 12 percent from 72.0 in February to 63.4 in March after two straight months of increases. It is now at 73 percent of January 2008’s level of 87.3. Retail sales rose 1.0 percent in February, the eighth-straight month of growth. February’s growth rate was 2.5 times higher than the long-term monthly average of 0.4 percent (since 1992), although actual retail sales volume—$387.1 billion—exceeds the pre-recession peak of three years ago ($379.8 billion in November 2007) by nearly 2 percent.

Inflation, as measured by the Consumer Price Index, was 0.5 percent in February; this is the highest monthly inflation rate since June 2009 and above the long-term monthly average of 0.4 percent (since 1970). February’s increase was due primarily to energy commodities (as fears about unrest in the Middle East continued), and food; shelter, airline fares, medical care, and new vehicles all posted increases as well. Over the past 12 months, the CPI has risen 2.1 percent.

March’s S&P 500 index, although providing the seventh-straight month of positive returns, barely registered as such at .04 percent. Year-over-year returns were 15.7 percent, down from the 22 percent 12-month returns of the previous two months, but still above the long-term 12-month average of 10.3 percent.

Real Estate Capital Markets


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Capital markets dipped on many fronts: commercial property sales volumes and prices, CMBS issuance and REIT returns all declined. CMBS delinquencies continue to rise. Multiborrower deals in the CMBS sectors appear to be a permanent fixture now.



CMBS issuance
 
remains active but fell in March to $3.37 billion from $5.18 billion in February, according to Commercial Mortgage Alert. February’s volume was the largest for a month since December 2007. Two multiborrower deals were priced in March, bringing the total to five for 2011 to date. CMBS delinquency rates, according to Trepp LLC, increased to 9.42 percent in January, another record high.



Commercial property sales volume
 
dropped from $8.3 billion in January to $6.2 billion in February, according to Real Capital Analytics. This was the second-straight month of decline; December’s sales volume of $25.6 billion was a three-year monthly high and substantially above the monthly average (since 2001) of $15.5 billion. From May through November, monthly volumes had ranged from almost 60 to 70 percent of the historical monthly average, while February’s volume was 40 percent of the monthly average. Thirty-seven percent of total sales volume was in the office sector, while 30 percent was in apartment sales.

The Moody’s/REAL Commercial Property Price Index continued its yearlong zigzag pattern, declining 1.2 percent in January, the second-straight month of decline after three months of increases. (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 43 percent from the peak value in October 2007.

The Investment Grade Index of the CoStar Commercial Repeat-Sale Indices declined 1.1 percent in January, the third-straight month of decline after three months of increases. (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 now down 33 percent from the peak value in June, July, and August 2007 but up 10.6 percent from a year ago. The General Grade Index of the CoStar Commercial Repeat-Sale Indices increased very slightly at 0.4 percent after three months of decline, but is still down almost 30 percent from peak value in February 2008 and down 11.3 percent from last year.

The REIT sector saw negative total returns in March of 1.3 percent after three straight months of strong positive returns, and although total one-year returns declined to 25.02 percent from 39.5 percent in February, they remain very healthy. Total returns for the month by property sector range from 0.34 percent for the apartment sector to 3.9 percent for the lodging/resort sector.

As reported in Barometer for the past two months, the NCREIF Property Index turned in a positive fourth quarter in 2010, with total returns of 4.62 percent, making 2010 a full year of consistently positive returns; total returns for the past year are 13.1 percent. Total returns for the quarter by property sector show the highest returns for apartments, 6.29 percent, and the lowest returns for lodging/resorts, 3.35 percent, and industrial property, 3.42 percent.

Capitalization rates, as reported by Real Capital Analytics (RCA), declined slightly to   7.16 percent in February, down from January’s level of 7.30 percent. RCA’s cap rates remain above the 6.39 percent of June 2007, but are below the historical norm of 7.6 percent (since 2001). As reported in last month’s Barometer, capitalization rates reported by NCREIF remained steady at 6.30 percent in the fourth quarter of 2010, similar to the third quarter’s level of 6.47 percent. NCREIF’s cap rates remain above the 5.4 percent of the first quarter of 2008 but are below the historical norm of 7.6 percent (since 1978).

For additional commentary on real estate capital markets, see the Capital Markets section of online Urban Land magazine.

Housing


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Multifamily starts declined dramatically in February after an equally dramatic rise in January, and single-family starts continued to decline. Permits, sales, and prices of new single-family homes continue at historically low levels and declined further in February. Prices of existing single-family homes remain depressed, though sales exceeded their long-term monthly average for the fourth-straight month. The forward-looking National Association of Realtors (NAR) Index of Pending Sales (of existing single-family homes, condos, and co-ops) increased 2.1 percent in February after a 2.8 percent decline in January.

Single-family building permits decreased for the second-straight month, down 9 percent from 421,000 in January to 382,000 in February. February’s permits are now at 39 percent of the historical monthly average (since 1970) and 21 percent of the pre-recession high in September 2005. Single-family starts decreased almost 12 percent from 425,000 in January to 375,000, the third-straight month of decline, and are now at 34 percent of the monthly average (since 1970) and 21 percent of the pre-recession high of January 2006.



Sales of new single-family homes
 
decreased 17 percent to 250,000 in February after a 10 percent decrease in January, and supply increased from 7.4 months to 8.9 months. Monthly sales of new single-family homes since May have been at lows not seen since record keeping began in 1963. Median prices for new single-family homes were down 14 percent in February to $202,100, the second-straight month of decline. December’s price of $236,800 had been the highest monthly price since July 2008.

The number of existing single-family home sales (seasonally adjusted) fell by almost 10 percent to 4.25 million in February, but remains 8 percent above the long-term monthly average (since 1970); still, monthly supply increased from 7.5 to 8.4 months. The S&P/Case-Shiller Index for existing home prices declined 1.0 percent, notching downward for the sixth-straight month; the January index is down 32 percent from the peak in July 2006. (This index is reported monthly as a three-month moving average, with a two-month lag.) NAR data show prices for existing single-family homes dropped 0.9 percent in February, the eighth-straight month of decline; prices are down 29 percent from the peak in 2006.

Multifamily building permits  declined by 2 percent to 121,000 in February and are now at 31 percent of the monthly average (since 1970). Multifamily housing starts declined by 47 percent in February after a 90 percent jump in January. Multifamily housing starts in February stood at 96,000, representing 27 percent of the monthly average (since 1970). Existing condo sales decreased 10 percent to 630,000, but this level is almost 12 percent above the long-term monthly average (since 1970), and monthly supply increased from 7.7 months to 9.9 months. Prices of existing condominiums declined 2 percent in February, according to NAR, and are down 34 percent from the peak in 2007.

Housing affordability remains near historical highs.

Foreclosure filings —default notices, scheduled auctions, and bank repossessions—decreased by almost 14 percent in February from a month earlier to 225,101, according to RealtyTrac; filings are 27 percent lower than one year ago. The firm attributes February’s decline and declines since September to lenders and servicers slowing the foreclosure process to correct any irregularities in foreclosure processes and documents; foreclosure activity is expected to resume at some point this year.

Home mortgage rates (30-year fixed) edged down from 4.95 percent in February to 4.83 percent in March (a calculated average of weekly rates), reversing a rising pattern over the previous four months.

Commercial/Multifamily


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Note: The commentary and data outlined below and in the accompanying table are the same as those presented last month because all the information is taken from quarterly data.

Vacancy and rental rates across all property types continued to stabilize, and vacancies actually declined in several sectors in the fourth quarter 2010. Rents are now between 5 and 16 percent below their pre-recession peak: apartment rents are down 5 percent from their peak, office rents are down 12 percent, retail rents are down 15 percent, the hotel revenue per available room (RevPAR) index is down 15 percent, and warehouse rents are down 16 percent. Vacancy rates for apartments are just above historical norms, while rates for all other property types remain well above historical norms.

Office vacancy rates stood at 18.6 percent in the fourth quarter of 2010; after a sustained vacancy rate of 18.9 percent in the previous three quarters, the vacancy rate has now returned to where it was in the fourth quarter a year ago, according to Property & Portfolio Research (the source of all data presented in this section). Completions in the fourth quarter, as a percentage of inventory, were 0.1 percent, the same as in the third quarter; this is substantially below the historical average of 0.7 percent. The absorption of 17.6 million square feet of space is almost triple the absorption of the previous quarter and continues the positive absorption first seen in the second quarter after seven consecutive quarters of negative absorption. Rents remained stable and are off just 1.5 percent from the same quarter a year ago.

Retail vacancy rates stood at 18.4 percent in the fourth quarter of 2010, down slightly from 18.8 percent in the third quarter and 80 basis points below the figure for the same quarter a year ago. Completions in the fourth quarter of 2010 as a percentage of inventory were 0.1 percent, the same as in the previous quarter and below the 0.6 percent historical average. Rents remained stable in the fourth quarter and are off 3.8 percent from the same quarter a year ago.

Warehouse vacancy rates stood at 12.2 percent in the fourth quarter of 2010, barely changing from 12.3 percent in the third quarter and 10 basis points below the figure for the same quarter a year ago. Completions in the fourth quarter of 2010 stood at 0.1 percent of inventory, the same as in the previous quarter and below the 0.6 percent historical average. Rents stayed about the same and are off 4.5 percent from the same quarter a year ago.

Apartment vacancy rates stood at 7.6 percent in the fourth quarter of 2010, the same as in the third quarter but 80 basis points below the figure for the same quarter a year ago. Completions in the third quarter of 2010 stood at 0.1 percent of inventory, the same as in the previous quarter and below the 0.4 percent historical average. Rents remained stable in the fourth quarter and are 1.9 percent above rents from the same quarter a year ago.

Hotel occupancy rates (a moving 12-month average) stood at 61.8 percent in the fourth quarter of 2010, up from 57.9 percent in the same quarter a year ago. Completions were down slightly as a percentage of rooms—from 3.1 percent in the fourth-quarter of 2009 to 1.7 percent—and are now below the historical average of 2.3 percent. The RevPAR Index was up 9.8 percent from the same quarter of 2009.