Summary

ULI Center for Capital Markets and Real Estate

The top ten trends in this month’s Barometer point to sparks as well as concerns in the economy, some weak signals in the capital markets, and some glimmer in the weak housing market. Compared with a year ago, 57 percent of the key indicators in the Barometer are better and 43 percent are worse.

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

In those top ten trends:

  • September’s private sector employment growth was a bright spot—coming in higher than the historical monthly average—and the high unemployment rate finally fell to a level not seen in almost three years. Still, stronger job growth is needed to capture the 6.3 million jobs lost starting almost four years ago.
  • Third-quarter 2011 GDP growth was revised downward to 2.0 percent in the second estimate. While still an improvement over the dismal second quarter, it remains lower than the historical GDP quarterly average.
  • Consumer confidence jumped in November, although it remains down one-third from three years ago; retail sales rose in October, but at a slower pace than in September.
  • Private construction value put in place increased in October to about 54 percent of the pre-recession high registered in March 2006.
  • NAREIT returns were negative in November in all sectors.
  • CMBS issuance in November jumped, continuing the volatility of the previous three months, and delinquency rates declined.
  • Commercial property prices were mixed in September, with small changes in both directions for different indices; all indices are off at least 30 percent from their pre-recession highs.
  • Commercial property transaction volumes were down in October and are now below the long-term monthly average. The top five most active sales markets in the past 12 months, according to Real Capital Analytics, are Manhattan, Los Angeles, Chicago, the Virginia suburbs of Washington, D.C., and Boston. The top 10 markets account for almost 54 percent of transactions over the past year.
  • Multifamily housing permits jumped in October to a monthly level not seen since September 2008.
  • Permits and starts of new single-family homes showed healthy growth in October, while sales just inched up and prices sagged slightly.

Economy

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Good news on employment growth came from both November’s figures and October’s revision upward. The unemployment rate fell but partially at the expense of those who gave up looking for jobs. Consumer confidence rebounded somewhat from last months’ low, and retail sales growth, while slower than last months’, was above the long-term monthly average. Private construction value increased. The bad news is that the already sluggish third quarter GDP growth was revised downward. S&P returns were negative again.

November’s net job growth of 120,000 jobs was welcome, as was the upward revision of October’s growth to 100,000. November’s growth is at the historical average monthly growth (since 1970), but much more momentum is needed. Overall, 1.6 million jobs have been created since September 2010—only 25 percent of the 6.3 million lost since February 2008. Private sector job gains in November occurred in retail, temporary help services, leisure and hospitality, and health care. Just over half of the decline in public sector employment took place at the local level. The unemployment rate fell from 9.0 percent in October to 8.6 percent in November, a level not seen for close to three years; however, about half the change was due to discouraged workers leaving the workforce. Fluctuations in the unemployment rate are likely when the employment situation improves sufficiently to draw discouraged workers back into the workforce.

The second estimate of third-quarter 2011 GDP growth is 2.0 percent, a disappointment but still higher than the second-quarter growth of 1.3 percent. Factors contributing to the third-quarter growth were personal consumption of durable goods and services, nonresidential fixed investment, exports, and federal government spending, which were partially offset by declines in private inventory and state and local government spending. Imports, which are a subtraction in the GDP, increased.

The Consumer Confidence Index jumped substantially in November to 56.0 after October’s decline had brought it to a 31-month low. It is now back up around the levels found in June and July but off one-third from the January 2008 level of 87.3. Total retail sales in October were up 0.5 percent. Whereas almost two-thirds of September’s more substantial retail growth was due to automobile sales—September’s growth in car sales exceeded total retail sales growth in October—October’s growth was led by groceries, building materials, and electronics. Actual retail sales volume—$397.7 billion—is 7.2 percent higher than one year ago but exceeds the pre-recession peak of $378.4 billion (in November 2007) by only 5 percent.

The value of total private construction put in place increased by 2.3 percent in October, the third-straight month of growth, and the value was back up to June’s level after a drop in July. Public construction put in place declined almost 2 percent and remains below June’s level. October’s total construction value of $798.5 billion is two-thirds of the pre-recession high in March 2006.

Inflation, as measured by the Consumer Price Index, was –0.1 percent in October. The decrease was due almost entirely to declines in energy costs, masking increases in most other categories. For the past 12 months, the CPI has risen 3.5 percent.

September’s S&P 500 returns were essentially flat, at –0.2 percent, after a solid reprieve in October followed five months of decline; year-over-year returns were also little changed at 7.8 percent.

Real Estate Capital Markets


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Commercial property prices were mixed, although all changes were small. Transaction volumes declined and were about at the historical monthly average (since 2001). NAREIT returns were negative in all sectors. CMBS issuance revived somewhat after October’s drop, and CMBS delinquency rates inched down. Bank real estate loan delinquency rates continue to fall in the third quarter

Capitalization rates, as reported by Real Capital Analytics, were stable at 7.06 percent in October. As reported in last month’s Barometer, NCREIF’s capitalization rates declined from 6.10 percent in the second quarter to 5.81 percent in the third quarter, the lowest level since the third quarter of 2008.

Commercial property sales volumes (excluding hotels) fell to $13.8 billion in October from $16.4 billion in September, according to Real Capital Analytics, below the long-term monthly average (since 2001). The office sector was most active with 39 percent of the transaction volume, followed by apartments (27 percent), retail (24 percent), and industrial (10 percent).

According to Real Capital Analytics, the ten most active sales markets in the past 12 months account for almost 54 percent of total transaction volumes. These markets are, in descending order: Manhattan, Los Angeles, Chicago, the Virginia suburbs of Washington, D.C., Boston, Dallas, Houston, San Francisco, Atlanta, and San Diego. Over $5.40 billion in transactions have been recorded in each of these cities since November 1, 2010.

The Moody’s/REAL Commercial Property Price Index was down 1.4 percent in September after four straight months of growth. (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 off 42 percent from their peak in October 2007 and up only 1.3 percent from a year ago.

The Investment Grade Index of the CoStar Commercial Repeat-Sale Indices increased 0.5 percent in September, after two months of decline. (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 35.8 percent from the peak value in June 2007 but up 2 percent from a year ago. The General Grade Index of the CoStar Commercial Repeat-Sale Indices increased 0.4 percent, the fifth-straight month of growth; it is now down 33.7 percent from its peak value in August 2007 and down 4.1 percent from a year earlier.

As reported in last month’s Barometer, the NCREIF Property Index turned in a positive third quarter, with total returns of 3.3 percent, sustaining the positive returns started in the first quarter of 2010. The capital appreciation component was 1.8 percent for the quarter. Total 12-month returns are now 16.1 percent. Total returns for the quarter by property sector range from 2.0 percent for the lodging/resorts sector to 3.6 percent for apartments.

After strong returns in September recaptured much of the previous two months’ losses, the REIT sector turned in dismal returns in October of –3.8 percent. One-year returns are now at 8.1 percent. Total returns for the month by property sector range from –2.4 percent for the lodging/resorts sector to –5.7 percent for the industrial sector.

CMBS issuance jumped to $2.36 billion in November after a dramatic fall to $770 million in October, according to Commercial Mortgage Alert. CMBS delinquency rates, according to Trepp LLC, decreased to 9.51 percent in November from 9.77 in October. Trepp indicates that this decrease is not likely to signal a trend because five-year balloon loans originated in 2005—when underwriting standards were at their weakest—are about to come due.

Bank real estate loan delinquency rates fell in the third quarter. Commercial and multifamily mortgage delinquency rates are 3.92 percent and 2.91 percent, respectively. Construction and development loans have the highest delinquency rate at 14.47 percent, substantially above the quarterly historical average (since 1991) of 5.0 percent.

Housing



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Permits and starts of new single-family homes showed healthy growth in October, while sales just inched up and prices sagged slightly. (Worth considering when regarding both positive and negative monthly news is that the single-family home industry is about the smallest it has been in over 40 years). Though activity in the multifamily industry also remains extremely low by historical standards, a welcome surprise came in the jump in multifamily permits, which reached the highest monthly level since September 2008.  Existing single-family sales grew and the Index of Pending Sales jumped dramatically. The price direction of existing homes was mixed in September, and the one data source for October showed declines.

The S&P/Case-Shiller Index for existing home prices moved down 0.6 percent in September after five straight months of growth, bringing it to just 3 percent above its post-recession low of March of this year and 31 percent below its 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) rose 0.7 percent in September after two straight months of decline; it is 3 percent above its post-recession low of March of this year but 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.) National Association of Realtors data (which report individual, unpaired transactions for the entire country) for September showed a decline for the third-straight month—of 3.4 percent—in the median price of existing single-family homes, and prices fell an additional 2.3 percent in October; median prices for existing single-family homes stood at $161,600, 3 percent above the post-recession low in February and 27 percent below the peak in 2006.

Median prices for new single-family homes slid 0.5 percent in October to $212,300, the fourth-straight month of decline. New home prices are now 4 percent above the post-recession low in October 2010 and down 14 percent from the peak in 2007.


Single-family building permits 
were up 5 percent in October to 434,000, making October the largest monthly permit volume since December 2010. October’s permit numbers remain at 45 percent of the historical monthly average (since 1970) and 24 percent of the pre-recession high in September 2005. Single-family starts rose almost 4 percent, from 414,000 in September to 430,000, and are now at 40 percent of the historical monthly average (since 1970) and 24 percent of the pre-recession high in January 2006.



Sales of new single-family homes
 
increased by only 1 percent in October. Both new single-family home sales volume and inventory are still at lows not seen since record keeping began in 1963. For monthly sales, this has been true in each of the past 18 months; for monthly inventory, this has been true for the past eight months.

The number of existing single-family home sales (seasonally adjusted) continued 2011’s seesaw pattern, increasing 2 percent in October to 4.38 million after a 4 percent decline to 4.31 million in September; still, monthly sales in the past 12 months have exceeded the long-term monthly average (since 1970). With a decrease in inventory as well as sales, supply fell to 7.8 months. October’s monthly sales were 69 percent of the pre-recession high in September 2005. The forward-looking National Association of Realtors Index of Pending Sales (of existing single-family homes, condos, and co-ops) jumped 10 percent in October after four straight months of decline.

Multifamily building permits rose 29 percent to 202,000 in October, the largest monthly permit volume since October 2008, and are now at 52 percent of the monthly average (since 1970). Multifamily housing starts decreased 13 percent in October to 183,000 from 211,000 in September, when figures were their highest for a single month since September 2008. The October figure represents 64 percent of the monthly average (since 1970). Existing condo sales were stable at 590,000, above the long-term monthly average (since 1970); with a decrease in inventory, supply declined from 10.7 months to 9.5.

September was one of the three best months for housing affordability since the National Association of Realtors began its index in 1989; the other two were this past January and February.

Foreclosure filings—default notices, scheduled auctions, and bank repossessions—increased by 7 percent in October from a month earlier to 230,678, according to RealtyTrac. The monthly number of new foreclosures has seesawed since June; RealtyTrac attributes this, in part, to various new state court rulings and state laws. At this point, foreclosure filings are 31 percent lower than they were one year ago.

Home mortgage rates (30-year fixed) fell in November to 3.99 percent, the lowest monthly rate since record keeping began in 1971.

Commercial/Multifamily


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Rents in the third quarter changed little in the retail, office and industrial sectors while year-over-year changes show rent declines in the retail and industrial sectors; rates are now off 12, 16, and 17 percent, respectively, from their pre-recession peak. Vacancy and availability rates for these sectors changed little in the third quarter as well, but the office and industrial sector saw improvement over the same quarter one year ago. Apartment rents increased in both the third quarter and over the year and are now about the same as the pre-recession high. Apartment vacancy rates experienced the largest positive movement of all property sectors.

Office vacancy rates stood at 16.2 percent in the third quarter, unchanged from the second quarter of 2011 and just below 16.7 percent in the same quarter one year ago, according to CBRE. Rents remained relatively stable and are up just 0.9 percent from the same quarter a year ago. The net absorption stood at 3.3 million square feet of space, less than half that of the previous quarter.

Retail availability rates stood at 13.2 percent in the third quarter, little changed from 13.3 percent in the second quarter of 2011 and 13.1 percent in the same quarter one year ago, according to CBRE. Rents inched down in the third quarter and are off 3.7 percent from the same quarter a year ago. The net absorption was positive at 3.5 million square feet, a reversal of the second quarter’s negative net absorption of almost 3.0 million square feet.

Industrial availability rates stood at 13.7 percent in the third quarter, little changed from 13.9 percent in the second quarter of 2011 but 80 basis points below the figure for the same quarter a year ago. Rents stayed the same and are off 1.2 percent from the same quarter a year ago. Net absorption remained strong at 34.6 million square feet, increasing almost 31 percent over the previous quarter.

Apartment vacancy rates stood at 5.0 percent in the third quarter, down from 5.4 percent in the second quarter and 40 basis points below the figure for the same quarter a year ago. Rents were up 1.3 percent in the third quarter and are 4.7 percent above rents of the same quarter a year ago. Completions in the second quarter of 2011 stood at 14,647 units, up from both the previous quarter and the same quarter a year ago.

Hotel occupancy rates stood at 6.5 percent in the third quarter of 2011, up from 63.9 percent in the same quarter a year ago, according to Smith Travel Research. The RevPAR Index was up 7.9 percent from the same quarter of 2010.

(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; The source of the data presented in this section of the Barometer changed last month: data for office, retail, industrial, and apartment property are now provided by CBRE. Smith Travel Research continues to be the source for hospitality properties.)