This month’s data are a mixed bag best approached with a healthy dose of perspective. The instances of positive figures are encouraging, but those figures are still not at levels high enough nor extensive enough to point to a vigorous recovery. And there are still seemingly unshakable issues to overcome in the economy and real estate markets.
Note: More commentary and data can be found throughout the tabs and in the accompanying tables. To download the January 2011 Barometer click on the PDF icon.
Unemployment, stuck on a high note for over a year, slid down a bit, but this is due less to job growth and more to discouraged workers exiting the workforce. The private sector continues to provide new jobs, but the plodding pace of job creation will only serve to keep the unemployment figure high as discouraged workers are eventually enticed to restart their job search and young, new workers enter the workforce.
Consumer confidence dipped even as retail sales continued to grow; retail sales volume is now poised to reach its pre-recession peak soon.
Commercial property prices rose while sales volume fell. Commercial mortgage–backed securities (CMBS) issuance remains active, while December’s CMBS delinquency rate reached a new high, yet again.
In housing news, prospects for the single-family sector—from permits to sales—are looking up, albeit compared with a low base, but prices did not follow. In contrast, the multifamily sector showed declines in each phase, but prices for condominiums rose. Still, pending home sales continue to rise. Foreclosure activity dipped for the second-straight month, but this is most likely temporary as lenders slow down to review foreclosure documents for potential irregularities.
Good news was matched with sobering perspective in December: the number of private sector jobs grew, but at a pace that points to several years until full recovery; the unemployment rate declined, but the decline is attributable, in part, to an increase in the number of discouraged workers leaving the workforce; retail sales growth continued, but the often-seesawing consumer confidence index fell. Still, the monthly returns for the S&P 500 index were strong and final third-quarter estimates for gross domestic product (GDP) were revised upward.
A net increase of 103,000 jobs in December was due to an increase of 113,000 private sector jobs (primarily in leisure and hospitality, and health care) and the loss of 10,000 government jobs. Higher job growth than the previous month is always welcome—the private sector added 71,000 jobs in November—but monthly private sector job growth has been seesawing like this for the past 12 months, averaging just 112,000 new jobs per month. A total of 1.1 million jobs in all sectors have been created since December 2009. A net total of 7.2 million have been lost over the past three years.
The unemployment rate fell from 9.8 to 9.4 percent, a sharper decrease than would have been indicated by job growth because of an increase in the number of discouraged workers—those not currently looking for work because they believe there are no jobs for them. December’s unemployment rate is the lowest since July 2009.
The final estimate of third-quarter 2010 GDP growth was revised upward to 2.6 percent, a welcome increase over the second-quarter growth of 1.7 percent. Still, the increase remains substantially below the first quarter’s growth of 3.7 percent, which inspired hope at that time that the economy was jolting awake. Then again, third-quarter growth is approaching the historical average (since 1970) of 2.9 percent, still suggesting that reliable, if not exciting, growth may be ahead.
The Consumer Confidence Index fell to 52.5 in December from 54.3, after three straight months of increases. It is now 60 percent of January 2008’s level of 87.3. Retail sales grew for the fifth-straight month in December, and although December’s growth rate dipped to less than half of November’s, it remains above the long-term average of 0.4 percent (since 1992). Actual retail sales volume—$378.7 billion—is just about back to the pre-recession peak of three years ago ($379.8 billion in November 2007).
Inflation, as measured by the Consumer Price Index, barely changed, increasing by 0.1 percent in November. Over the past 12 months, the CPI has risen 1.1 percent.
December’s S&P 500 index saw strong positive returns of 6.7 percent, the fourth-straight month of positive returns, a substantial improvement from November’s pitiful (but still positive) return of 0.01 percent. Year-over-year returns climbed from 9.9 percent in November to 15.1 percent as of the end of December—above the long-term average of 10.2 percent.
Real Estate Capital Markets
The real estate capital markets remain mixed as CMBS delinquency rates rose to their highest level ever even as CMBS issuance continued to be active; property sales volumes are at about half their monthly average while commercial property prices, though still low, showed some upward movement. Still, REIT returns were strong.
The REIT sector saw positive total returns in December of 4.7 percent after a dip in November. Total returns for the past year remain a healthy 28.0 percent. Total returns for the month by property sector range from 9.9 percent for the industrial sector to 3.1 percent for the retail sector.
CMBS issuance was active in December for the fifth-straight month, according to Commercial Mortgage Alert, with $2.16 billion total issuance, none of which was a multiborrower deal. CMBS delinquency rates, according to Trepp LLC, increased to 9.20 percent in December. December’s delinquency rate is the highest in the history of the CMBS industry.
Property sales volumes fell in November to $8.2 billion from $8.8 billion in October, according to Real Capital Analytics, and are now at 53 percent of the monthly average since 2001. This follows five straight months which sales volumes were between 55 and 67 percent of the historical monthly average.
The Moody’s/REAL Commercial Property Price Index rose 1.3 percent in October, the second month in a row of increases after three straight months of decline. (This index is reported monthly as a three-month moving average, with a two-month lag.) Values are now 58 percent of the peak value in October 2007. The Green Street Advisors’ Commercial Property Price Index, based on estimates of private market value for REIT portfolios, was unchanged in October, rose 2.1 percent in November, and rose 0.8 percent in December. It is now at 82 percent of the peak value in August 2007.
Capitalization rates remained fairly steady at 7.28 percent in November, similar to October’s level of 7.34 percent. Cap rates remain above the 6.39 percent of June 2007, but are just below the historical norm of 7.6 percent (since 2001).
As reported in last month’s Barometer, the NCREIF Property Index turned in the third positive quarter in 2010, with total returns of 3.86 percent; total returns for the past year are 5.8 percent. Total returns for the quarter by property sector show the highest returns for apartments, 6.04 percent, and the lowest returns for industrial property, 2.8 percent.
For additional commentary on real estate capital markets, see the Capital Markets section of online Urban Land magazine.
(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 were in a stabilizing pattern in the third quarter, continuing a trend seen in the first and second quarters of 2010. With this leveling off, rents are now between 6 and 18 percent below their pre-recession peak: apartment rents are down 6 percent from their peak, office rents are down 12 percent, retail rents are down 14 percent, warehouse rents are down 15 percent, and the hotel revenue per available room (RevPAR) index is down 18 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 19.5 percent in the third quarter of 2010, about the same as in the second quarter, and just 50 basis points above the rate in the third quarter a year ago, according to Property & Portfolio Research (the source of all data presented in this section). Completions in the third quarter were down as a percentage of inventory, decreasing from 0.2 percent in the first quarter to 0.1 percent; figures for both quarters are substantially below the historical average of 0.7 percent. The absorption of 11.1 million square feet of space continues the positive absorption first seen in the second quarter after nine quarters of negative absorption. Rents remained stable and are off 3.6 percent from the same quarter a year ago.
Retail vacancy rates stood at 18.8 percent in the third quarter of 2010, down slightly from 19.2 percent in the second quarter and just 20 basis points above the figure for the same quarter a year ago. Completions in the third quarter of 2010 as a percentage of inventory were 0.1 percent, the same as in the second quarter and below the 0.6 percent historical average. Rents remained stable in the third quarter and are off 4.0 percent from the same quarter a year ago.
Warehouse vacancy rates stood at 13.1 percent in the third quarter of 2010, down slightly from 13.2 percent in the second quarter and 50 basis points above the figure for the same quarter a year ago. Completions in the third quarter of 2010 stood at 0.1 percent of inventory, up from virtually no activity in the previous quarter and below the 0.6 percent historical average. Rents stayed about the same and are off 5.9 percent from the same quarter a year ago.
Apartment vacancy rates stood at 7.7 percent in the third quarter of 2010, down slightly from the second quarter and 60 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 first quarter and are off just 0.3 percent from the same quarter a year ago.
Hotel occupancy rates (a moving 12-month average) stood at 60.9 percent in the third quarter of 2010, up from 58.4 percent in the same quarter a year ago. Completions were down slightly as a percentage of rooms, from 3.2 percent in third-quarter 2009 to 2.1 percent—now below the historical average of 2.2 percent. The RevPAR Index was up 9.2 percent from the same quarter of 2009.
Permits, starts, sales, and prices of new single-family homes are all up, though all remain at only 20-plus percent of their pre-recession highs and at not even half their historical monthly averages. For existing single-family homes, sales are up and now exceed their long-term monthly average, though prices declined in October and were flat in November. Starts and permits for multifamily units fell to a fraction of their historical monthly averages, and while sales fell slightly, they are approaching their historical monthly averages and prices increased. The forward-looking National Association of Realtors’ (NAR) Index of Pending Sales rose 3.5 percent in November after a 9.2 percent rise in October.
Single-family building permits increased 3 percent from 404,000 in October to 416,000 in November and are now 43 percent of the monthly average (since 1970) and 23 percent of the pre-recession high of September 2005. Single-family starts increased 6.9 percent from 534,000 in October to 555,000 and are now 42 percent of the monthly average (since 1970) and 26 percent of the pre-recession high of January 2006. Sales of new single-family homes increased 5 percent to 290,000 in November, and supply decreased from 8.8 months to 8.2 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 up 8 percent in November at $213,000 from October’s prices of $197,200. October had marked the first time since 2003 that median prices for new homes were below $200,000.
The number of existing single-family home sales (seasonally adjusted) increased by 6.7 percent to 4.15 million in November, a level that now slightly exceeds the long-term monthly average (since 1970); monthly supply decreased from 10.1 to 9.3 months. The S&P/Case-Shiller Index for existing home prices notched downward for the third-straight month; the October index is down 30 percent from the peak in July 2006. (This index is reported monthly as a three-month moving average, with a two-month lag.) Data from the National Association of Realtors (NAR) show existing single-family home prices virtually flat in November after four straight months of decline; prices are down 23 percent from the peak in 2006.
Multifamily building permits decreased by 24.2 percent to 94,000 in November, one of the lowest points in the low-level zig-zag pattern seen over the past two years. Multifamily permits are now 24 percent of the monthly average (since 1970). Multifamily housing starts fell by 18.2 percent, following a 40.5 percent decline in October. Multifamily housing starts in November stood at 72,000, representing 20 percent of the monthly average (since 1970). Existing condo sales fell 2 percent to 530,000, and with a 15 percent decline in inventory, monthly supply slid slightly from 13.2 months to 11.3 months. Prices of existing condominiums increased 1.5 percent in November, according to NAR, after four straight months of decline and are 5.5 percent lower than they were last November.
Housing affordability remains near historical highs.
Foreclosure filings—default notices, scheduled auctions, and bank repossessions—decreased 21 percent in November from a month earlier to 262,339 filings, according to RealtyTrac. The firm attributes this drop—the largest monthly drop since RealtyTrac began publishing the data in 2005—not only to the typical seasonal drop of 7 to 10 percent, but also to lenders and servicers slowing the foreclosure process to correct any irregularities in foreclosure processes and documents.
Home mortgage rates (30-year fixed) remained low—4.71 percent in December—but have edged up since November.