Summary

ULI Center for Capital Markets and Real EstateApartment fundamentals are shining even brighter as low vacancy rates drop further and rents continue hitting new highs; completions are at a three-year high. Buyer appetite for commercial property continues unabated as prices closed in on four-year highs, cap rate compression continued, and transaction volume remained above the long-term monthly average. Economic indicators pointed to sustained moderate growth except retail sales; sales slowed even as retail employment soared.

Significantly, 85 percent of the key indicators in the Barometer are better than a year ago. At this time last year (December 5, 2011), only 57 percent of the key indicators were better than a year earlier.

The top ten trends in this month’s Barometer:

  • Employment growth continued at a relatively steady pace, above the monthly long-term average. Retail sales declined in October, but retail employment soared in November. GDP growth was revised upward to just shy of the long-term quarterly average.
  • CMBS issuance vaulted to a five-year high and spreads tightened. The delinquency rate reversed direction after several months of decline.
  • Growth in commercial property prices was strong, bringing them to, or close to, four-year highs. Monthly cap rate compression resumed and rates are just 22 basis points above the low of mid-2007. Total REIT returns were negative for the third-straight month.
  • Commercial property transaction volume was off slightly from the previous month and from one year ago, but exceeds the long-term monthly average.
  • Single-family and multifamily housing permits and starts continue to climb to four-year highs. Inventory of new single-family homes, which had declined to a 50-year low during the summer, is now on the upswing.
  • Sales of existing homes increased while sales of new homes were down just slightly. Increases in prices of existing homes continue at healthy rates (for sources that cover 20 of the largest cities), are almost imperceptible (for those that cover the entire country), or have reversed (for those that include distressed homes).
  • Apartment fundamentals continue on a vigorous track, as already-low vacancy rates dropped further and rents climbed to new all-time highs; completions are at a three-year high, so the pace of these improvements may soon be tempered.
  • Office and industrial fundamentals continue to improve, albeit very slowly, as vacancy rates creep down and rents creep up; completions remain at extremely low levels.
  • Retail fundamentals show one small sign of improvement as availability rates dipped below 13 percent, but rents continue their 4.5-year decline; completions are at a fraction of their historical monthly average.
  • Growth in hotel occupancy rates and RevPAR was healthy in the third quarter compared with the same quarter one year ago.

Click on Economy, Real Estate Capital Markets, Housing, Commercial/Multifamily for more details.

(For annual projections of key Barometer indicators, see the new ULI Real Estate Consensus Forecast).

Economy


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Employment growth has fluctuated within a band of 132,000 to 192,000 jobs for five straight months, consistently above the 40-year monthly average. Unemployment fell to the lowest level in close to four years. The third-quarter GDP growth rate was revised upward to just shy of the long-term quarterly average. Consumer confidence is at a five-year high, but this has not yet translated into retail sales; in fact, sales declined in October. The manufacturing sector contracted after two months of expansion. Private construction continued to grow, almost entirely due to residential development.


Net job growth
 in November of 146,000 jobs was made up of 147,000 new private sector jobs and the loss of 1,000 public sector jobs. Net growth for October was revised downward to 138,000 due to large losses in the public sector, particularly in local education; private sector employment growth was revised slightly upward. The country has 4.2 million fewer jobs than it did almost five years ago. At November’s growth rate, it would take more than two years to regain just those 4.2 million jobs. The greatest private sector job gains in November by far were in retail trade, followed by substantial but smaller gains in leisure and hospitality, administrative and support services, and health care. The overall unemployment rate in November fell to 7.7 percent from 7.9 percent in October, below 8.0 percent for the third time since the beginning of 2009 and for the third-straight month. The downward pressure this month was due to shrinkage of the labor force.

Third-quarter GDP growth was revised upward to 2.7 percent (from the initial estimate of 2.0 percent) and is up from 1.3 percent for the second quarter. First-quarter GDP growth was 2.0 percent. The increase in the third quarter primarily reflects contributions from personal consumption expenditures, federal government spending, residential fixed investment, and exports that were partly offset by negative contributions from nonresidential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased slightly.

The Consumer Confidence Index edged up 0.6 points in November to 73.7, its highest level in almost five years. Total retail sales in October were down 0.3 percent, driven by declines in sales of motor vehicles, building materials, food services, and clothing. While retail sales of $411.6 billion are 3.8 percent higher than those of a year earlier, they exceed the prerecession peak of $378.4 billion (in November 2007) by only 8.8 percent. According to the U.S. Census Bureau, the effect of Hurricane Sandy on these numbers cannot be isolated, but indications are that the storm had both positive and negative effects on the retail sales data; this additional variation was not large enough to substantially affect the reliability of the published sales estimates.

The value of private construction increased 1.6 percent in October and is now 15.5 percent higher than a year ago. Public construction put in place increased 0.8 percent but is off 1.0 percent from a year earlier. September’s total construction value of $872.1 billion is down 28 percent from the prerecession high in March 2006, with private construction down 38 percent.

Inflation, as measured by the Consumer Price Index, rose 0.1 percent, a significant change after two straight months of 0.6 percent. While the increases in August and September were due primarily to a rise in the gasoline index—9.0 percent and 7.0 percent, respectively—more than half of October’s smaller increase was due to the largest increase in the price of shelter (primarily rentals) in over 4.5 years.

Monthly S&P 500 returns were 0.6 percent in November, but year-over-year returns were 16.1 percent.

The Purchasing Managers’ Index contracted in November, moving to 49.5 percent from 51.7 percent in October, according to the Institute for Supply Management. The figures for October and September had indicated a generally expanding manufacturing sector, whereas the levels for June, July, and August had indicated contraction. Hurricane Sandy appears to be less of an explanation, since the Production Index actually increased, than apprehension about the fiscal cliff and general economic concerns.

Real Estate Capital Markets



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Commercial real estate prices strengthened, according to all data sources, and prices are at or near four-year highs. Cap rate compression has resumed and cap rates are just 22 basis points above the low of mid-2007. Total transaction volume was off slightly from the previous month and from one year ago but exceeds the long-term monthly average. Total REIT returns were negative for the third-straight month. CMBS issuance vaulted to a five-year high, and delinquencies reversed their decline.

Capitalization rates, as reported by Real Capital Analytics (RCA), were 6.75 percent in October—down 9 basis points from September, breaking from a four-month plateau. NCREIF capitalization rates continued to compress in the third quarter, slipping from 5.96 percent in the second quarter of 2012 to 5.88 percent in the third quarter.



Commercial property sales volumes
 
(excluding land and hotels) declined by 8 percent to $16.9 billion, according to RCA. This is the third-straight month of decline, but October’s volume still exceeds the monthly long-term average (since 2001). Transactions declined in the apartment and industrial sectors and increased in the office and retail sectors. Compared with October 2011, transactions are off by 2.5 percent, entirely due to a decline in the office sector.

According to Real Capital Analytics, the ten most active sales markets in the past 12 months are, in descending order: Manhattan, Los Angeles, Phoenix, Chicago, San Francisco, Dallas, Houston, Seattle, Boston and Atlanta. Over $6.9 billion in transactions have been recorded in each of these cities since November 1, 2011.

Moody’s/RCA Commercial Property Price Index was up 1.4 percent to its highest level since January 2009. (This is a same-property index based on all U.S. transactions exceeding $2.5 million.) Values are now down 22 percent from the peak value in December 2007 and are about 7 percent higher than a year ago.

The new value-weighted composite CoStar Commercial Repeat-Sale Index rose 1.3 percent in September, to its highest level in almost four years, and is up almost 10 percent from a year ago. (This index is based on a repeat-sales methodology that tracks transactions exceeding $100,000 and includes land sales.) Values are down 17 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 1.5 percent to its highest level in just over five years. Values are now just off the peak by 2 percent and are 7 percent higher than a year ago.

The NCREIF Property Index turned in a positive third quarter with total returns of 2.3 percent, sustaining the consistently positive returns for almost three years, but at a somewhat slowing rate of growth over the past year. The capital appreciation component was 0.9 percent for the quarter, the lowest it has been since appreciation turned positive in mid-2010. Total 12-month returns are now 11.0 percent. Returns for the quarter by property sector were all between 2.1 percent and 2.4 percent.

Total equity REIT returns were  –0.29 percent in November, negative for the third-straight month. For individual core sectors, returns were negative for the industrial, office, and apartment sectors, at –0.9 percent, –1.0 percent, and –3.0 percent, respectively. Returns were positive for the lodging/resort sector at 2.0 percent and flat for the retail sector. One-year total returns as of November stood at 19.1 percent, with one-year returns reaching 28 percent for both the retail and industrial sectors. Lodging/resorts and apartments had the lowest one-year returns at 10.9 percent and 8.5 percent, respectively.



CMBS issuance
 
vaulted to $6.65 billion in November, the highest monthly volume since the end of 2007, according to Commercial Mortgage Alert. According to Trepp LLC, CMBS delinquency rates rose to 9.71 percent in November, breaking a three-month streak of declines from the all-time high of 10.34 percent in July.

Bank real estate loan delinquency rates continued to fall in the third quarter. Commercial and multifamily mortgage delinquency rates are now 3.16 percent and 1.84 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 9.54 percent, substantially above the quarterly historical average (since 1991) of 5.3 percent.

Housing


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Prices of existing homes continue to rise at relatively healthy rates, according to a leading source of repeat sales in 20 large cities. According to a source of repeat sales that tracks the entire country, price growth since early summer has been almost imperceptible. According to a source on unpaired transactions, prices declined, albeit barely; those data include distressed homes sold at deep discounts. Sales of existing homes increased despite concerns that the ten-year inventory low would discourage potential buyers. For new single-family homes, prices slipped for the second-straight month after having recovered to their prerecession peak, and sales were down just barely. Inventory of new homes, which had reached the lowest level in 50 years during the summer, is now growing. Permits and starts continue to climb to four-year highs for both single-family and multifamily housing. New foreclosures were up from the previous month’s five-year low, but varied considerably by state.

Existing single-family home prices rose for the sixth-straight month, according to the S&P/Case-Shiller Index (which tracks repeat sales in 20 cities), with a 0.29 percent increase in September. The rate of growth has progressively slowed over the past three months from the highest monthly rates since mid-2004 registered in May and June. Still, growth in September was healthy—just above the long-term monthly average (since 2000)—and prices are now up 3.0 percent from a year ago. Even with these gains, prices remain significantly down—29 percent—from 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) rose for the eighth-straight month, although the last three months’ growth rates have been almost imperceptible, ranging from 0.02 percent in July to 0.03 percent in September, and are far below the long-term monthly average (since 1991). In contrast, growth rates in March, April, and May were the largest in 21 years, and in June, the largest in seven years.  With these increases, prices are now up 4.5 percent from a year ago. Still, the index is 15 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), barely slipped by 0.11 percent, but this is the fourth-straight month of decline. The pattern of the past four months is in marked contrast with the substantial increases for March through June, which accounted for the longest sustained period of strong price growth in more than 40 years—totaling a whopping 21 percent. The median price for existing single-family homes stood at $178,700 in October and, with the months of high growth, is 11 percent higher than one year ago. Still, prices are now 19 percent below the peak in 2006.


New single-family home prices
 were down 4.2 percent in October, the second-straight month of decline. October’s price of $237,700 is up 5.7 percent from October 2011 and 4 percent below the 2007 peak.

Single-family building permits were up 3.2 percent in October (an annual rate based on a three-month moving average) to 541,000. The number of permits has steadily increased each of the past 18 months and is at its highest level in more than four years (since September 2008). Still, this September’s permit numbers are almost 70 percent below the prerecession high witnessed in November 2005 and 43 percent below the long-term monthly average (since 1970). Single-family housing starts increased 5.5 percent in October (on a three-month moving average) to 576,000 and are now at their highest level in four years (since October 2008); starts are 68 percent below the prerecession high in November 2005.



Sales of new single-family homes
 
barely changed in October, moving down to 368,000 from 369,000 in September. Sales have remained between 360,000 and 369,000 over the last six months, the longest sustained period of sales of 360,000 or above in three years (since May through November 2009). Sales are now up 17 percent over October 2011. Still, monthly sales volumes are 73 percent below the prerecession high in July 2005. Inventory increased for the second-straight month, reversing five years of monthly declines; the multiyear decline had brought inventory in July and August to the lowest monthly level since record keeping began (1963).

Sales of existing single-family homes (seasonally adjusted) rose by almost 2 percent in October to 4.2 million, 10 percent higher than those of a year earlier and the second-highest monthly level (behind August) since May 2010. October’s monthly sales were 33 percent below the prerecession high in September 2005. Inventory remained unchanged at 1.89 million, a monthly level not seen since 2002 (with the exception of a weather-related dip in January 2005). The forward-looking NAR Index of Pending Sales (of existing single-family homes, condominiums, and co-ops) jumped 5 percent to 104.8, the highest point of the previous 12 months. The index had stayed within a narrow range of 99.2 to 101.9 since May.

Multifamily building permits rose 1 percent to 285,000 in October (based on a three-month moving average), the highest level since August 2008. Multifamily housing starts were up 11 percent in October to 250,000, the third-straight month of strong growth after three months of retreat, and are now at their highest level since September 2008.

The rent index for apartments, calculated quarterly by CBRE, was up 1.0 percent in the third quarter of 2012 to $1,310, which is 4.8 percent higher than a year earlier. Apartment vacancy rates, reported quarterly by CBRE, dropped to 4.5 percent in the third quarter of 2012, continuing an almost three-year slide.

Existing condo sales have steadily increased over the last four months, reaching   570,000 in October. This is up 21 percent over October 2011 and 16 percent above the long-term monthly average (since 1989). Inventory declined by 9 percent in October and remains substantially lower than one year ago—off 27 percent—and 29 percent below the long-term monthly average; supply declined from 6.0 months to 5.3 months.

New foreclosure filings—default notices, scheduled auctions, and bank repossessions—increased 3 percent in October to 186,455, according to RealtyTrac, from September’s five-year low. RealtyTrac noted: “We continued to see vastly different foreclosure trends across the country in October, depending primarily on how each state’s foreclosure infrastructure was able to handle the high volume of delinquent loans during the worst of the foreclosure crisis in 2010. Unfortunately, the three states with the biggest rebound in deferred foreclosure activity—New Jersey [with an increase of 140 percent in October], New York [123 percent], and Connecticut [41 percent]—also had to deal with the devastation to homes inflicted by super storm Sandy. The foreclosure moratoriums being put into effect as a result of the storm will likely extend the already lengthy time to foreclose in these states, further prolonging a fundamentally sound housing recovery.” Florida remained the state with the highest foreclosure rate for the second-straight month (one out of every 312 housing units), followed by Nevada and Illinois.

Home mortgage rates (30-year fixed) fell slightly from 3.38 percent in October to 3.35 percent in November. November’s rate was the lowest monthly rate since record keeping began in 1971.

Commercial/Multifamily



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The apartment sector continues on a vigorous track, with already low vacancy rates dropping further and rents climbing to new all-time highs; with completions at a three-year high, the pace of these improvements may soon be tempered. Office and industrial fundamentals continue to improve in the third quarter, albeit very slowly, as vacancy rates creep down, rents creep up, and both are assisted by extremely low completion levels. Retail fundamentals show one small sign of relative improvement as availability rates dipped below 13 percent, but rents continue their 4.5-year decline; completions are at a fraction of the historical monthly average for this sector. Both hotel occupancy rates and RevPAR showed healthy improvement from a year earlier.


Office vacancy rates
 are down to 15.5 percent in the third quarter of 2012 from 15.7 percent in the second quarter, according to CBRE. The last two years have been marked by slow declines in vacancy rates interspersed by plateaus. Rents crept up 0.5 percent in the third quarter, the seventh-straight quarter of rent growth, and are up 2.8 percent from a year earlier. Net absorption was 8.5 million square feet (789,676 sq m), about 75 percent of the long-term average (since 1988), while completions remain low at 12 percent of the long-term average (since 1980).


Retail availability rates
 barely changed, down from 13.0 percent in the second quarter to 12.9 percent in the third quarter, according to CBRE; still, this is the third-straight month of decline (albeit slow) and the first time in almost three years below 13.0 percent. Rents continued their 4.5-year slide in the third quarter and are off 1.4 percent from a year earlier. Net absorption was 2.8 million square feet (260,178 sq m), about one-third of the long-term average (since 1989); completions stood at less than 10 percent of the long-term average (since 1980).



Industrial availability rates
 
barely changed, notching down from 13.2 percent in the second quarter to 13.1 in the third quarter, but continued their slow eight-quarter decline; rates are now down 60 basis points from the same quarter a year earlier. Rents edged up for the third-straight quarter but are still barely above the 14-year low reached in the last quarter of 2011. Net absorption was strong at 21.65 million square feet (2.01 million sq m), close to 70 percent of the long-term average (since 1980); completions stood at about 20 percent of the long-term average (since 1980).


Apartment vacancy rates
 dropped to 4.5 percent in the third quarter of 2012, continuing an almost three-year slide. Rents were up 1.0 percent in the third quarter and are 4.8 percent higher than a year earlier. Absorption remained high at 170 percent of the long-term average (since 1994). Completions in the third quarter were fairly steady at 35,095 units, after a sharp jump to a three-year high in the second quarter. Completions are at 83 percent of the long-term average (since 1994).

Hotel occupancy rates stood at 67.1 percent in the third quarter of 2012, up from 66.3 percent in the same quarter a year earlier, according to Smith Travel Research, while the RevPAR Index was up 5.2 percent from a year earlier.