A jarring blow to hopes for a smooth, if not speedy, recovery dominates this month’s Barometer data. Job growth was the lowest in eight months and the impact of rising food and energy prices was widespread; capital markets indicators were down; and the weak housing data stay weak. Overall, 50 percent of key indicators in the Barometer are worse than they were one year ago, 48 percent are better, and 2 percent are unchanged.
Note: More commentary and data can be found throughout the tabs and in the accompanying tables.
Economic news was decidedly disappointing. First-quarter 2011 GDP growth remains weak (in the second revision) and employment growth in May was discouragingly down. If job growth were to continue at this pace, it would take almost 11 years to replace the jobs lost in the recession. Retail sales were boosted almost solely by rising prices, consumer confidence is down, and S&P returns were negative.
Most real estate capital markets indicators were down, including commercial sales volumes, price indices, and REIT returns. CMBS delinquencies retreated a bit but are still the second-highest rates recorded since 1999. However, CMBS issuance bounced up this month, and two more multiborrower CMBS deals were priced; to date in 2011, there have been eight multiborrower deals.
The good news in the housing sector is that foreclosure activity is on the decline again (after a one-month increase) as lenders adopt new policies. Price indices for existing homes were down very slightly or stable for March while median sales prices for new and existing homes were up very slightly in April but remain depressed; altogether, there is some indication that the decline in price may be leveling off. Permits and starts of all types of homes were down in April. Sales of new single-family homes increased but remain historically low, while sales of existing single-family homes decreased but are substantially above their long-term averages. Pending home sales declined.
The economy provided a series of undesirable signals this month. First-quarter 2011 GDP growth was unchanged in the second estimate and remains just over half its long-term average, employment growth is far below the long-term monthly average, the impetus for retail sales growth was price increases, consumer confidence was down, and S&P 500 returns were negative.
A net increase of 54,000 jobs in May was due to an increase of 83,000 private sector jobs (primarily in professional and technical services, health care and social assistance, and food services) and the loss of 29,000 government jobs (primarily in local government). A total of 1.33 million jobs have been created since May 2010—only 19 percent of the net total of 6.95 million lost since February 2008.
The unemployment rate in May inched up for the second-straight month and is now 9.1 percent, its highest level in five months.
The second estimate of first-quarter 2011 GDP growth remained unchanged at 1.8 percent, a disturbing drop from fourth-quarter 2010 GDP growth of 3.1 percent and significantly below the long-term quarterly average growth of 2.9 percent. Contributing factors were a larger decrease in federal government spending, a sharp upturn in imports, and decelerations in personal consumption expenditures, nonresidential fixed investment (particularly structures), and exports.
The Consumer Confidence Index dropped almost 8.0 percent from 66.0 in April to 60.8 in May, its lowest level in six months. It is now at 70 percent of January 2008’s level of 87.3. Retail sales rose 0.5 percent in April, the ninth-straight month of growth, but much of this growth was due to a rise in gasoline and food prices. Actual retail sales volumes—$389.4 billion—exceed the pre-recession peak of $379.8 billion (in November 2007) by only 2.9 percent.
Inflation, as measured by the Consumer Price Index, was 0.4 percent in April, the same as the long-term monthly average (since 1970) and down from March’s inflation rate of 0.5 percent; the CPI in March showed the highest monthly inflation rate since June 2009. April’s increase was due primarily to prices for gasoline and fuel oil, but used cars and trucks, new vehicles, and food all contributed as well. Over the past 12 months, the CPI has risen 3.2 percent.
May’s S&P 500 were -1.13 percent, after eight straight months of positive activity, although year-over-year returns were healthy at 26.0 percent, above the long-term 12-month average of 10.5 percent.
Real Estate Capital Markets
Commercial property prices continue to decline according to two major indexes (though two others show gains), and sales volumes and returns were anemic. The CMBS market offered some good news in the real estate capital markets with an increase in CMBS issuance and a decline in delinquencies.
CMBS issuance is still a shadow of its former self, but remains active after a sharp dip in April; issuance increased from $0.89 billion in April to $3.05 billion in May, according to Commercial Mortgage Alert, almost a complete return to March’s issuance level. Two multiborrower deals were priced in May, accounting for most of the total issuance and bringing total multiborrower deals to eight in 2011 so far. CMBS delinquency rates, according to Trepp LLC, decreased to 9.60 percent in May, a welcome change after nearly two years of steadily increasing monthly rates. Still, even with this decline, May’s rate remains the second-highest delinquency rate ever recorded.
Commercial property sales volumes declined to $8.8 billion in April from $10.4 billion in March, according to Real Capital Analytics, and are now 56 percent of the historical monthly average (since 2001) and in the ballpark of the transaction volumes of 2002. Office buildings accounted for 36 percent of total sales volumes in April and apartment buildings for another 36 percent. According to Real Capital Analytics, the most active sales markets in the past 12 months are, in descending order, Manhattan, Los Angeles, Chicago, Washington, D.C., Dallas, District of Columbia–Virginia suburbs, San Francisco, Boston, Houston, and Phoenix. Over $3.8 billion in transactions has been recorded in each of these cities since May 1, 2010.
The Moody’s/REAL Commercial Property Price Index continued its yearlong zigzag pattern, declining 4.25 percent in March, the fourth-straight month of decline after three months of increases. (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 47 percent to their lowest level since their peak in October 2007, and down 8.5 percent from a year ago.
The Investment Grade Index of the CoStar Commercial Repeat-Sale Indices declined 4.9 percent in March, the third-straight month of decline after three months of increases. (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 38 percent from the peak value in June 2007 but up 2.2 percent from a year ago. The General Grade Index of the CoStar Commercial Repeat-Sale Indices slipped just 0.5 percent after remaining steady in February, and is now down 32 percent from peak value in February 2008 and down almost 12 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 most recent GSA Commercial Property Price Index (May) was also positive, increasing by 3.0 percent, and is up by 21 percent over the past year.
The REIT sector saw low-key total returns in May of 1.0 percent, although total one-year returns remain healthy at 31.4 percent. Total returns for the month by property sector range from –0.5 percent for the lodging/resort sector to 2.6 percent for the apartment sector.
Capitalization rates, as reported by Real Capital Analytics, declined slightly to 7.09 percent in April from March’s 7.23 percent. Cap rates remain above the 6.39 percent 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 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 declined in April, and sales of new single-family homes remain at historically low levels. Existing home sales are strong and, although prices remain significantly off from the pre-recession peak, there is some indication that the decline in price may be leveling off. But the forward-looking National Association of Realtors (NAR) Index of Pending Sales (of existing single-family homes, condos, and co-ops) decreased almost 12 percent in April.
The S&P/Case-Shiller Index for existing home prices declined 0.8 percent in March and is now down 33 percent from the peak in July 2006; March is the eighth-straight month of decline. (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) remained steady after nine straight months of decline; it is down 20 percent from the peak in April 2007. (The HPI covers the entire country and is reported monthly with a two-month lag). However, NAR data for March showed a 2.0 percent price increase for existing single-family homes, and in April prices increased by another 1.6 percent; median prices for existing single-family homes stood at $163,200, down 27 percent from the peak in 2006. Median prices for new single-family homes rose 1.6 percent in April to $217,900, down 12 percent from the peak in 2007.
Single-family building permits decreased almost 2 percent from 392,000 in March to 385,000 in April. April’s permit numbers are now at 40 percent of the historical monthly average (since 1970) and 22 percent of the pre-recession high in September 2005. Single-family starts declined 5 percent from 415,000 in March to 394,000 and are now at 36 percent of the historical monthly average (since 1970) and 22 percent of the pre-recession high of January 2006.
Sales of new single-family homes increased 7 percent to 323,000 in April, the second-straight month of solid growth, and supply decreased from 7.2 months to 6.5 months. Despite these positive changes, monthly sales of new single-family homes in each of the past 12 months have been the lowest since record keeping began in 1963.
The number of existing single-family home sales (seasonally adjusted) declined by 0.5 percent to 4.42 million in April after a 3.7 percent increase in March, but is still 12 percent above the long-term monthly average (since 1970) and is a strong 72 percent of the pre-recession high in 2006; monthly supply increased from 8.1 to 9.0 months. The forward-looking NAR Index of Pending Sales (of existing single-family homes, condos, and co-ops) declined 11.6 percent in April following two straight months of increase.
Multifamily building permits decreased by 14 percent to 143,000 in April and are now at 36 percent of the monthly average (since 1970). Multifamily housing starts decreased by 28 percent in April to 114,000, representing 32 percent of the monthly average (since 1970). Existing condo sales fell by 3 percent to 630,000, but they are still 11 percent above the long-term monthly average (since 1970); with an increase in inventory at the same time that sales slowed, monthly supply increased from 10.0 months to 10.5 months.
Housing affordability remains near historical highs.
Foreclosure filings—default notices, scheduled auctions, and bank repossessions—fell by almost 9 percent in April from a month earlier to 219,258, according to RealtyTrac; filings are 34 percent lower than one year ago. This follows March’s increase of 7 percent, the sole monthly increase since declines began in September as lenders and servicers sought to correct any irregularities in those processes and documents. RealtyTrac attributes the continued slowdown to new practices that include longer waits on the lenders’ part between delinquency and foreclosure to allow consideration of other courses of action and a longer foreclosure process when that is the chosen option.
Home mortgage rates (30-year fixed) slid to 4.64 in May after holding steady at 4.84 for two 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.