Yet another blow to hopes for a speedy recovery dominates this month’s Barometer data. Job growth was stunningly low and the previous month’s low employment growth was revised even lower; capital markets indicators were mixed at best; and the weak housing data remained weak. Still, compared with one year ago, 61 percent of key indicators in the Barometer are better than they were, 38 percent are worse, and less than 2 percent are unchanged..
Note: More commentary and data can be found throughout the tabs and in the accompanying tables.
Economic news was alarming. First-quarter 2011 GDP growth remained weak (in the final revision) and employment growth in June was even lower than last month’s shocking drop in job growth. Only a net loss of jobs could be worse. If job growth were to continue at this month’s pace, it would take 32 years to replace the jobs lost in the recession. Consumer confidence continued to decline and retail sales were down for the first time in a while; S&P returns were negative.
In real estate capital markets, prices continue to decline, according to two major indices, and are now off 37 to 49 percent from their pre-recession peak; REIT returns are down again. Commercial sales volumes and CMBS issuance remain at historically low levels, although each experienced strong step-ups. And CMBS delinquencies retreated for the second-straight month.
In the housing market, new foreclosure activity continues to decline, while lenders are finding their REO inventory difficult to unload. Sales of new single-family homes, at historically low levels, declined again, while prices have edged up and are within view of their pre-recession peak. Sales of existing single-family homes, recently robust and above the long-term monthly averages, slipped this month. While prices for existing single-family homes appear to have reversed their months-long decline, prices remain significantly off their pre-recession peak. Despite these weaknesses, permits and starts of all types of housing were up in May. Pending home sales increased.
For the second month in a row, the economy provided a series of distinctly undesirable signals. Everything is going in the wrong direction—employment growth, consumer confidence, and retail sales are down—and the unemployment rate is up. The final first-quarter 2011 GDP growth remains substantially below its long-term average as the impact of government cutbacks, among other factors, is being felt, and S&P 500 returns were negative.
A net increase of 18,000 jobs in June was due to an increase of 57,000 private sector jobs (primarily in leisure and hospitality, professional and technical services, and health care) and the loss of 39,000 government jobs (from all levels of government). A total of 1.04 million jobs have been created since June 2010—only 15 percent of the net total of 6.98 million lost since February 2008.
The unemployment rate in June inched up for the third-straight month and is now 9.2 percent (up from 9.1 percent), its highest level in six months.
The final estimate for first-quarter 2011 showed GDP growth inched up to 1.9 percent (from the earlier estimate of 1.8), but still well below the fourth-quarter 2010 GDP growth of 3.1 percent and significantly below the long-term quarterly average growth of 2.9 percent. Contributing factors to the first-quarter decline were a decrease in government spending at all levels, a sharp upturn in imports, a deceleration in personal consumption spending, and a decline in fixed investment in structures (primarily nonresidential) and exports. But business inventories contributed to first-quarter GDP, unlike in the fourth quarter when they were a drag on growth.
The Consumer Confidence Index dropped over 5.0 percent from 61.7 in May to 58.5 in June, its lowest level in seven months. It is now at 67 percent of January 2008’s level of 87.3. Retail sales declined in May after ten straight months of growth, although much of the recent growth was due to a rise in gasoline and food prices. The decline was concentrated in motor vehicles, but declines were also seen in electronics, furniture, general merchandise, and food. Actual retail sales volume—$387.1 billion—exceeds the pre-recession peak of $378.4 billion (in November 2007) by only 2.3 percent.
Inflation, as measured by the Consumer Price Index, was 0.2 percent in May, below the long-term monthly average (since 1970) and down from April’s inflation rate of 0.4 percent; the CPI in February and March, both at 0.5 percent, showed the highest monthly inflation rate since June 2009. May’s slowdown was due primarily to a decline in gasoline and fuel oil prices—the first decline in this category since June 2010—as all other categories continued to rise. Over the past 12 months, the CPI has risen 3.6 percent.
June’s S&P 500 returns were negative for the second-straight month, at –1.67 percent, after eight straight months of positive activity, although year-over-year returns were healthy at 30.7 percent, above the long-term 12-month average of 10.6 percent.
Real Estate Capital Markets
Commercial property prices continue to decline, according to two repeat-sales indexes, and REIT returns are negative in all property sectors. Transaction volume and the CMBS market offer some good news in the real estate capital markets with similar percentage jumps in sales and CMBS issuance, although both levels remain below their historic monthly averages. A welcome decline in CMBS delinquencies is due to loans being “resolved with losses, rather than delinquent loans actually curing,” according to Trepp LLC.
remains a shadow of its former self, but is active; issuance increased from $3.18 billion in May to $4.31 billion in June, according to Commercial Mortgage Alert. This was the second-highest issuance level since March 2008. Three multiborrower deals were priced in June, accounting for almost 80 percent of the total issuance and bringing total multiborrower deals to 11 so far this year. CMBS delinquency rates decreased to 9.37 percent in June, according to Trepp, the second-straight month of decline after nearly two years of steadily rising monthly rates.
Commercial property sales volumes
jumped to $12.3 billion in May from $9.0 billion in April, according to Real Capital Analytics, and are now 79 percent of the historical monthly average (since 2001). Office buildings accounted for 34 percent of total sales volumes in May and apartment buildings for another 30 percent. According to Real Capital Analytics, the most active sales markets in the past 12 months are, in descending order, Manhattan, Los Angeles, Chicago, Virginia suburbs of Washington, D.C., Dallas, San Francisco, Washington, D.C., Boston, San Diego, and Phoenix. Over $4.46 billion in transactions have been recorded in each of these cities since June 1, 2010.
The Moody’s/REAL Commercial Property Price Index fell 3.69 percent in April, the fifth-straight month of decline. (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 49 percent from their peak in October 2007, the lowest level since this index began tracking prices in 2001; it is down 13.4 percent from a year ago. However, prices for major properties in major markets rose substantially in June and have generally seen a strong upward trends since late 2009.
The Investment Grade Index of the CoStar Commercial Repeat-Sale Indices declined 5.4 percent in April, the fourth-straight month 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 44 percent from the peak value in August 2007 and down 9.5 percent from a year ago. The General Grade Index of the repeat-sale indices slipped 1 percent, the seventh-straight month of decline, and is now down 37 percent from peak value in August 2007 and down 13 percent from last year.
The NCREIF Property Index turned in a positive first quarter, with total returns of 3.36 percent, continuing the positive returns seen throughout 2010. The capital appreciation component was 1.84 percent for the quarter. Total 12-month returns are now 16 percent. Total returns for the quarter by property sector vary little, with all returns falling between 3.19 and 3.68 percent.
The GSA Commercial Property Price Index, based on estimates of private market values for properties in REIT portfolios, up 1.76 percent in April and 3.1 percent in May, barely changed in June with a 0.05 percent increase.
The REIT sector saw negative total returns in June of 3.1 percent, although total one-year returns remain healthy at 34.1 percent. Total returns for the month by property sector range from -4.5 percent for the office sector to -2.3 percent for the retail sector.
Capitalization rates, as reported by Real Capital Analytics, were fairly stable at 7.09 percent in May. Cap rates remain above the 6.39 percent level of June 2007, but are below the historical norm of 7.6 percent (since 2001).
Capitalization rates reported by NCREIF fell slightly to 6.10 percent in the first quarter from the fourth-quarter 2010 level of 6.33 percent. NCREIF’s cap rates remain above the 5.4 percent level 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.
Permits and starts for all types of housing rose in May even as sales of new single-family homes declined. Regardless of the direction of these changes, permits, starts, and new single-family sales volume remain at historically low levels. Prices of new single-family homes, however, are relatively close to their peak. In contrast, prices of existing homes remain significantly off from the pre-recession peak, although there were much-welcome increases in April and May, while sales volume declined but is close to its long-term average. The forward-looking National Association of Realtors (NAR) Index of Pending Sales (existing single-family homes, condos, and co-ops) stepped up, reversing much of April’s decline.
The S&P/Case-Shiller Index for existing home prices rose 0.7 percent in April after eight months of decline and is now down 33 percent from the peak in July 2006. (This index, a composite of 20 cities, is reported monthly as a three-month moving average with a two-month lag.) The Federal Housing Finance Agency (FHFA) House Price Index (HPI) also rose in April, by 1.8 percent, after ten straight months of decline; it is down 19 percent from the peak in June 2007. (The HPI covers the entire country and is reported monthly with a two-month lag.) NAR data for April showed a modest 0.4 percent price increase for existing single-family homes, while in May prices increased by a stronger 3.3 percent; median prices for existing single-family homes stood at $166,700, down 25 percent from the peak in 2006. Median prices for new single-family homes rose 2.6 percent in May to $222,600, down just 10 percent from the peak in 2007.
Single-family building permits increased 2.5 percent from 395,000 in April to 405,000 in May. May’s permit numbers are now at 42 percent of the historical monthly average (since 1970) and 23 percent of the pre-recession high in September 2005. Single-family starts increased almost 4 percent from 404,000 in April to 419,000 and are now at 38 percent of the historical monthly average (since 1970) and 23 percent of the pre-recession high in January 2006.
Sales of new single-family homes fell 2 percent to 319,000 in May after two-straight months of solid growth, but with a drop in inventory, supply decreased from 6.3 months to 6.2 months. Monthly sales of new single-family homes in each of the past 13 months have been the lowest since record keeping began in 1963.
The number of existing single-family home sales (seasonally adjusted) declined 3.2 percent to 4.24 million in May after a 1.4 percent decline in April and is now just below the long-term monthly average (since 1970) and at 67 percent of the pre-recession high in September 2005; supply increased from 8.8 to 9.0 months. Still, the forward-looking NAR Index of Pending Sales (existing single-family homes, condos, and co-ops) increased 8.2 percent in May, reversing most of the 11 percent drop in April.
Multifamily building permits rose 29 percent to 190,000 in May and are now at 48 percent of the monthly average (since 1970). Multifamily housing starts increased 8.9 percent in May to 134,000, representing 38 percent of the monthly average (since 1970). Existing condo sales fell 8 percent to 570,000, just above the long-term monthly average (since 1970); supply increased from 10.5 months to 11.3 months.
Housing affordability remains near historical highs.
Foreclosure filings—default notices, scheduled auctions, and bank repossessions—fell almost 2 percent in May from a month earlier to 214,927, according to RealtyTrac; filings are 33 percent lower than one year ago. RealtyTrac notes that, beyond the number of new foreclosure filings reported here, the inventory of unsold bank-owned REOs increased in April and May. “That points to continued weak demand from buyers, making it tough for lenders to unload their REO inventory,” it said.
Home mortgage rates (30-year fixed) slid to 4.51 in June, the lowest level in seven months.
(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).
In the first quarter of 2011, rental rates across all property types continued to stabilize, and vacancies declined in several sectors. Rents are now between 4 and 16 percent below their pre-recession peak: apartment rents are down 4 percent from their peak, office rents are down 12 percent, retail rents are 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 first quarter, unchanged from the fourth quarter of 2010, and barely down from a vacancy rate of 18.9 percent in the first three quarters of 2010, according to Property & Portfolio Research (the source of all data presented in this section). The amount of newly completed space in the first quarter of 2011 was up over the fourth quarter of 2010, with 7.45 million square feet of space added versus 4.10 million square feet added in the fourth quarter; still, this is substantially below the historical quarterly average (since 1982) of 28.5 million square feet. The absorption of 6.4 million square feet of space is only 40 percent of the rate of the previous quarter but continues the positive absorption first seen in the second quarter of 2010 after seven consecutive quarters of negative absorption. Rents remained stable and are off just 0.3 percent from the same quarter a year ago.
Retail vacancy rates edged down from 18.4 percent in the fourth quarter of 2010 to 17.9 percent in the first quarter; the vacancy rate is now 150 basis points below the figure for the same quarter a year ago. The amount of newly completed space in the first quarter of 2011, 3.1 million square feet, was down from the figure for the fourth quarter of 2010, 4.10 million square, and is 12 percent of the historical quarterly average. Rents remained about the same in the first quarter and are off 3.1 percent from the same quarter a year ago.
Warehouse vacancy rates stood at 11.9 percent in the first quarter, down from 12.1 percent in the fourth quarter of 2010 and 60 basis points below the figure for the same quarter a year ago. Completions in the first quarter stood at 2.50 million square feet, down from the previous quarter and only 10 percent of the historical quarterly average. Rents stayed about the same and are off 3.1 percent from the same quarter a year ago.
Apartment vacancy rates stood at 7.4 percent in the first quarter, barely down from the fourth quarter of 2010 but 90 basis points below the figure for the same quarter a year ago. Completions in the first quarter of 2011 stood at 8,800 units, down from the previous quarter and the same quarter a year ago; completions were 22 percent of the quarterly historical average. Rents were up very slightly (0.6 percent) in the first quarter and are 2.8 percent above rents of the same quarter a year ago.