The top 11 trends in this month’s Barometer point to cautious optimism in the economy, mixed signals in the capital markets, and a welcome spark in the weak housing market. Compared with a year ago, 67 percent of the key indicators in the Barometer are better and 33 percent are worse.
Note: More commentary and data can be found throughout the tabs and in the accompanying tables.
In those top 11 trends:
- December’s private sector employment growth was very good—coming in at more than double the historical monthly average—and the high unemployment rate finally inched down to a level not seen in almost three years. Still, at December’s growth rate, it would take 2.5 years just to regain the 6.1 million jobs lost in the past four years, and improvement would depend not only on private sector job growth but also on a stemming of the loss of public sector jobs.
- Third-quarter 2011 GDP growth was revised downward to 1.8 percent in the final estimate. While still an improvement over the dismal second quarter, it remains lower than for any quarter in 2010.
- Consumer confidence jumped in December, continuing the momentum of November’s strong increase, although it remains down considerably from four years ago; retail sales rose in November but at a disappointing pace.
- Total construction value put in place increased in November to about two-thirds of the pre-recession high registered in March 2006.
- REIT total returns were healthy in all sectors.
- CMBS issuance, still at relatively low levels, rose in December for the second-straight month, suggesting an easing away from the volatility of the past year; delinquency rates were on the rise once again.
- Commercial property prices were mixed in October, showing strong growth, moderate growth, or no change, depending on the index and property grade. Repeat-sales indices are off about 30 percent from their pre-recession highs while an estimate-based index is down less than 10 percent.
- Commercial property transaction volumes were down in November and are 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.
- Permits, starts, and sales of new single-family homes were up slightly in November but prices declined. The industry remains about the smallest it has been in over 40 years.
- Multifamily housing permits and starts jumped in November to monthly levels not seen since fall 2008. While still low relative to its long-term average activity, this industry is closer to normal levels than the single-family industry.
- Total foreclosure filings are down, but one phase, scheduled auctions, are at a nine-month high. These will come onto the market as REOs or short sales.
Very good news on employment growth came in December as figures were double those of November and the unemployment rate fell to an almost three-year low. Consumer confidence continued its rebound from October’s 31-month low, while retail sales were weak. Private construction value grew but only slightly. The bad news is that the already sluggish third-quarter GDP growth was further revised downward. S&P returns changed little but were positive.
December’s net job growth of 200,000 jobs was encouraging—a doubling of November’s revised growth of 100,000. December’s growth is above the historical average monthly growth (since 1970), but much more momentum is needed. The country still has 6.1 million fewer jobs than it had four years ago (January 2008). At December’s growth rate, it would take 2.5 years to regain just that number of jobs, and improvement would require not only private sector job growth but also a stemming of the loss of public sector jobs; this timeline does not address the additional employment needs of a growing population. Private sector job gains in December occurred in couriers/messengers, health care, retail, food services, durable goods manufacturing, and construction. Eighty percent of the decline in public sector employment took place at the local level. The overall unemployment rate fell from 8.7 percent in November to 8.5 percent in December, the lowest rate in 34 months.
The final estimate of third-quarter 2011 GDP growth is 1.8 percent, a disappointing downward revision from previous estimates, although above the second-quarter growth of 1.3 percent. At this point, growth in each of the first three quarters of 2011 was lower than that for any quarter of 2010. Factors contributing to the third-quarter growth were nonresidential fixed investment (primarily equipment and software), personal consumption of durable goods, exports, and federal government defense spending. These 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 in December to 64.5, continuing the momentum of November’s strong increase. October’s decline had brought it to a 31-month low, but the Index is now back up to levels seen earlier in 2011. Still, it is off substantially from the January 2008 level of 87.3. Total retail sales in November were up a somewhat weak 0.2 percent, led by sales growth in electronics and appliances, automobiles, and apparel. Actual retail sales volume—$399.3 billion—is 6.7 percent higher than one year ago but exceeds the pre-recession peak of $378.4 billion (in November 2007) by only 5.5 percent.
The value of total private construction put in place increased by less than 1 percent in November, but it was the fourth-straight month of growth, and the value was the highest monthly value in two years. Public construction put in place, which increased by 1.7 percent, is lower than any monthly value in 2010 and at about the monthly average for 2011. November’s total construction value of $807.1 billion is two-thirds of the pre-recession high in March 2006.
Inflation, as measured by the Consumer Price Index, was unchanged in November. The energy index declined for the second month in a row and offset increases in the indexes for food and all items less food and energy. For the past 12 months, the CPI has risen 3.4 percent.
December’s S&P 500 returns were close to flat, at 1.0 percent, and followed weak returns in November of –0.2 percent; year-over-year returns were also little changed at 2.1 percent.
Real Estate Capital Markets
Commercial property prices were mixed, ranging from strong growth for investment-grade property, indicated by repeat-sales indices, to no change, indicated by estimates of REIT portfolio market values. Transaction volumes declined and were below the historical monthly average (since 2001). NAREIT returns were strong in all sectors. CMBS issuance moved up as did CMBS delinquency rates.
Capitalization rates, as reported by Real Capital Analytics, fell slightly from 7.05 percent in October to 7.01 in November. As reported in last month’s Barometer, NCREIF’s capitalization rates declined from 6.06 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 $8.7 billion in November from $14.0 billion in October, according to Real Capital Analytics, below the long-term monthly average (since 2001) and the lowest level in nine months. The apartment sector was most active with 36 percent of the transaction volume, followed by office (32 percent), retail (17 percent), and industrial (15 percent).
According to Real Capital Analytics, the ten most active sales markets in the past 12 months account for 49 percent of total transaction volumes. These markets are, in descending order: Manhattan, Los Angeles, Chicago, the Virginia suburbs of Washington, D.C., Dallas, Boston, Houston, Atlanta, San Francisco, and northern New Jersey. Over $5.63 billion in transactions have been recorded in each of these cities since December 1, 2010.
The Investment Grade Index of the CoStar Commercial Repeat-Sale Indices rose 3.4 percent in October, the third-straight month of growth. (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 down 31 percent from the peak value in June 2007 but up about 7 percent from a year ago. The General Grade Index of the CoStar Commercial Repeat-Sale Indices increased 1.4 percent, the fifth-straight month of growth; it is now down 32 percent from its peak value in August 2007 but up 1 percent from a year earlier.
The GSA Commercial Property Price Index, based on estimates of private market values for REIT portfolios, was unchanged in December, after an increase of 0.7 percent in November and no change in October. It has increased 12 percent over the past 12 months, with most of growth occurring in late winter and early spring 2011; it is now down just 8 percent from its peak value in August 2007.
(Please note that the Moody’s/REAL Commercial Property Price Index, previously reported in the Barometer, is no longer produced.)
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.
Positive returns of 4.8 percent in the REIT sector in December reversed November’s dip. One-year returns are now at 8.3 percent. Total returns for the month by property sector range from 3.8 percent for both office and retail sectors to 5.8 percent for the apartment sector.
CMBS issuance rose 13 percent from $2.36 billion in November to $2.66 billion in December, according to Commercial Mortgage Alert. CMBS delinquency rates, according to Trepp LLC, increased to 9.58 percent in December from 9.51 percent in November.
As reported in last month’s Barometer, 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 14.57 percent, substantially above the quarterly historical average (since 1991) of 5.0 percent.
Activity in the multifamily industry remains extremely low by historical standards, but substantial growth this month (as well as last) brought permit and start activity to levels not seen since fall 2008. The single-family home industry remains about the smallest it has been in over 40 years, but permits, starts, and sales of new single-family homes were up slightly in November; prices declined. Existing single-family home sales grew and were above their historical average, and the Index of Pending Sales jumped dramatically. The price of existing homes declined in October, according to all three sources monitored by the Barometer, while the one data source for November prices showed an increase.
The S&P/Case-Shiller Index for existing home prices moved down 1.2 percent in October, the second-straight month of decline after five straight months of growth, bringing it to just 2 percent above its post-recession low of March 2011 and 32 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) declined 0.4 percent in October; it is 2 percent above its post-recession low of March 2011 but down 19 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 November show a rise in prices of 1.9 percent. NAR’s October data showed a decline of 2.6 percent, the fourth-straight month of decline in the median price of existing single-family homes. Median prices for existing single-family homes stood at $164,100, 5 percent above the post-recession low in February 2011 and 26 percent below the peak in 2006.
Median prices for new single-family homes slid 3.8 percent in November to $214,100, more than canceling the 3.5 percent jump in October. New home prices are now around 5 percent above the post-recession low in October 2010 and down 14 percent from the peak in 2007.
Single-family building permits were up 1.6 percent in November to 435,000, making it the biggest month in terms of permit volume in 12 months. November’s permit numbers remain at 45 percent of the historical monthly average (since 1970) and 76 percent below the pre-recession high in September 2005. Single-family starts rose just over 2 percent, from 437,000 in October to 447,000 in November, and are now at 41 percent of the historical monthly average (since 1970) and 76 percent below the pre-recession high in January 2006.
Sales of new single-family homes increased by less than 2 percent in November. 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 for the past 19 months; for monthly inventory, this has been true for the past nine months. Sales are now 77 percent below the pre-recession high of July 2005.
The number of existing single-family home sales (seasonally adjusted) increased 4 percent in November to 3.95 million. Sales zigzagged throughout 2011, and November’s sales are down slightly from last January’s sales; still, November’s sales and those in ten of the past 12 months exceeded the long-term monthly average (since 1970). With a decrease in inventory, supply fell to 7.0 months. November’s monthly sales were 38 percent below 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) rose 7.3 percent in November; the 10 percent jump in October had reversed four straight months of decline. The last time the index was higher was in April 2010, the deadline for the first-time homebuyer credit.
Multifamily building permits rose 16 percent to 224,000 in November, the largest monthly permit volume since October 2008, and are now at 58 percent of the monthly average (since 1970). Multifamily housing starts jumped 32 percent in November to 230,000 from 174,000 in October, more than reversing the September-October decline. More important is that November’s figure is the highest for a single month since September 2008, though it represents only 65 percent of the monthly average (since 1970). Existing condo sales were stable at 470,000, just 3 percent below the long-term monthly average (since 1989); with a decrease in inventory, supply declined from 8.8 months to 7.1 months.
December was one of the two best months for housing affordability since the National Association of Realtors began its index in 1989; only November was better.
Foreclosure filings—default notices, scheduled auctions, and bank repossessions—decreased by about 3 percent in November from a month earlier to 224,394, according to RealtyTrac. The monthly number of new foreclosure filings has seesawed since January 2010; RealtyTrac has attributed this, in part, to various new state court rulings and state laws. November’s slowdown also mirrors the seasonal slowdowns seen in each of the past four years. RealtyTrac further notes that, despite the total overall decline in November, scheduled auctions reached a nine-month high, corresponding to a recent surge in default notices that began in August. These auctions roll into the market as REOs or short sales. At this point, foreclosure filings are 14 percent lower than they were one year ago, the smallest annual decrease in the past 12 months.
Home mortgage rates (30-year fixed) fell in December to 3.96 percent, the lowest monthly rate since record keeping began in 1971.
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.)