Summary

ULI Center for Capital Markets and Real EstateThe top 12 trends in this month’s Barometer highlight a wavering economy, more down than up signals in the capital markets, mixed directions in property fundamentals, and a housing market that remains on a low simmer. Still, 76 percent of the key indicators in the Barometer are better than a year ago, 1 percent remain the same, and only 23 percent are worse. (For annual projections of key Barometer indicators, see the new ULI Real Estate Consensus Forecast).

Note: More commentary and data can be found throughout the tabs and in the accompanying tables.

In those top 12 monthly trends:

  • Employment growth in May was a discouraging 69,000 jobs, the lowest monthly gain in 12 months. At May’s pace, it would take six years to regain the 5 million jobs lost in the past four and a half years. The unemployment rate, which had reached a three-year low in April, inched up again in May.
  • GDP growth in the first quarter of 2012, already estimated to be lower than the fourth-quarter figure, was revised further downward. GDP growth is now substantially below its 40-year quarterly average.
  • Consumer confidence fell and growth in retail sales was weak, even when adjusted for the decline in gasoline prices. Both monthly and year-over-year S&P 500 returns were negative.
  • Private construction was the only slightly bright spot in the economy, as it continued to inch up. Still, total construction is off by one-third from its pre-recession high. Investment-grade property prices were unchanged in March or declined slightly, as indicated by two repeat-sales indices; general-grade prices were close to flat. All prices remain substantially off from their pre-recession high.
  • REIT returns were negative in all sectors in May, and year-over-year returns are low.
  • Commercial property transaction volumes fell in April, continuing the zigzag pattern of the past year and a half.
  • CMBS issuance activity stepped up to the highest volume in 15 months, and CMBS delinquency rates rose to a record high.
  • Office vacancy and retail availability in the first quarter were unchanged from the fourth quarter, while industrial availability and apartment vacancy improved slightly. All sectors, including hotels, improved compared with a year ago except for the retail sector, which remains at the same high level.
  • Apartment rents and hotel revenue per available room (RevPAR) show continued strong growth, with apartment rents now surpassing their pre-recession high. Rents in the industrial and office sectors are slowly inching up; retail rents are still declining.
  • The multifamily housing construction industry maintained its momentum with permits and starts at three-and-a-half-year highs, although these current levels are only about 60 percent of their long-term monthly averages (since 1970).
  • In the single-family housing construction industry, permits are near a two-year high, though starts declined for the second-straight month; both figures are only approaching 50 percent of their long-term monthly averages (since 1970). Sales of new single-family homes increased but are still near 50-year lows, and prices declined.
  • Total foreclosure filings were down in April to their lowest monthly level in almost five years.

Economy



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Most of the news on the economy was discouraging: first-quarter GDP growth was revised downward; private sector employment growth was the lowest in 12 months; public sector job losses were up; monthly and 12-month S&P returns were negative; consumer confidence declined; and retail sales were weak. The only good news is that the value of private construction put in place continues to inch up.

Net job growth in May of 69,000 jobs was made up of 82,000 private sector jobs gained and the loss of 13,000 public sector jobs. After a brief halt in net government layoffs in February, losses have risen for the third-straight month and occurred at all levels of government. At the state and local level, losses are primarily in education. The country has 5.0 million fewer jobs than it did almost four and a half years ago. At May’s growth rate, it would take six years to regain just those 5 million jobs—a timeline that does not address the additional employment needs of a growing population. Private sector job gains in May occurred in health care, transit and ground passenger transportation, wholesale trade, manufacturing of durable goods, and educational services. The overall unemployment rate inched up to 8.2 percent in May after having dipped slightly in April to 8.1 percent, the lowest rate in three years.

Estimated GDP growth for the first quarter of 2012 was revised downward from the advance estimate to 1.9 percent. This is substantially below the fourth-quarter 2011 rate of 3.0 percent and the long-term quarterly average (since 1970) of 2.8 percent. Factors contributing to first-quarter growth were personal consumption expenditures (primarily goods), exports, private inventory investment, and residential fixed investment. These were partially offset by declines in federal government spending, and state and local government spending. Imports, which are a subtraction in the GDP, rose.

The Consumer Confidence Index fell 5.5 percent in May to 64 after barely changing in April. It is now at 74 percent of the pre-recession level in January 2008 of 87.3. Total retail sales in April were up a weak 0.1 percent, the result primarily of strong growth in sporting goods/hobby/books, furniture, health/personal goods, motor vehicles, and grocery stores, which were largely offset by large declines in building materials/garden equipment, department stores, and clothing, as well as a smaller decline in gasoline sales. Excluding gasoline sales, total retail sales in April were up 0.2 percent. Retail sales of $408 billion are 6.4 percent higher than one year ago but exceed the pre-recession peak of $378.4 billion (in November 2007) by only 7.8 percent.

The value of private construction edged up in April for the third-straight month. Public construction put in place decreased in April for the fifth-straight month. April’s total construction value of $820.7 billion is down 32 percent from the pre-recession high in March 2006.

Inflation, as measured by the Consumer Price Index, was unchanged in April due to increases in all non-energy items being offset by significant declines in all energy items. For the past 12 months, the CPI has risen 2.3 percent.

Monthly S&P 500 returns were negative in May—down 6 percent—following a smaller decline in April. Year-over-year returns were also negative, down 0.4 percent.

Real Estate Capital Markets


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Capital markets were more down than up: commercial property transaction volumes fell, CMBS issuance increased but delinquency rates rose to a new high, REIT monthly returns were negative, and prices were unchanged or declined slightly, as indicated by two different repeat-sales indices. Bank real estate delinquency rates continued to move down.

Capitalization rates, as reported by Real Capital Analytics (RCA), were 6.99 percent, unchanged from April. As reported by NCREIF, capitalization rates fell from 6.03 percent in the fourth quarter of 2011 to 5.97 percent in the first quarter of 2012. First-quarter cap rates are close to their lowest levels seen since the third quarter of 2008.




Commercial property sales volumes

  
(excluding land and hotels) fell 41 percent to $12.9 billion in April, according to RCA, continuing the zigzag pattern seen over the past one and a half years. The office sector was the most active with 36 percent of the transaction volume, followed by apartments (30 percent), retail (19 percent), and industrial (15 percent).

The ten most active sales markets in the past 12 months accounted for 40 percent of all transactions. They were, in descending order, Manhattan, Los Angeles, Chicago, Boston, Houston, Dallas, San Francisco, the Virginia suburbs of Washington, D.C., Seattle, and Atlanta, according to RCA. Over $6 billion in transactions have been recorded in each of these cities since May 1, 2011.

The Moody’s/RCA Commercial Property Price Index was essentially unchanged in March. (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 20 percent from the peak value in December 2007 and up 12.2 percent from a year ago.

The Investment Grade Index of the CoStar Commercial Repeat-Sale Indices declined 0.8 percent in March, according to CoStar. (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 36 percent from the peak value in June 2007 but up 8.2 percent from a year earlier. The General Grade Index of the CoStar Commercial Repeat-Sale Indices was essentially flat. The index is now down 34 percent from its peak value in August 2007 and up 3.7 percent from a year earlier.

The NCREIF Property Index turned in a positive first quarter of 2012 with total returns of 2.6 percent, sustaining the positive returns that began in the first quarter of 2010. The capital appreciation component was 1.2 percent for the quarter. Total 12-month returns are now 13.4 percent. Returns for the quarter by property sector range from 1.5 percent for the lodging/resorts sector to 2.8 percent for both retail and apartments.

REIT returns were negative in May in all sectors. One-year returns are now only 2.7 percent.



CMBS issuance
 
increased to $4.7 billion in May from $3.3 billion in April, the highest monthly volume in 15 months, according to Commercial Mortgage Alert. According to Trepp LLC, CMBS delinquency rates increased to a record high of 10.04 percent in May from 9.80 percent in April as more five-year loans that were securitized in 2007 reached their maturity dates.

Bank real estate loan delinquency rates continued to fall in the first quarter of 2012. Commercial and multifamily mortgage delinquency rates are now 3.67 percent and 2.36 percent, respectively. Construction and development loans have the highest delinquency rate at 12.52 percent, substantially above the quarterly historical average (since 1991) of 5.2 percent.

Housing


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Multifamily monthly permits and starts are at highs not seen in three and a half years. Single-family monthly permits are near a two-year high, sales rose to the second-highest level in two years, prices increased, but starts fell. Even at these recent high points, activity in both the multifamily and single-family construction industries remains near historically low levels. Sales of existing single-family homes rose and are above historical averages; still the National Association of Realtors (NAR) Index of Pending Sales fell. Existing housing prices are lower than they were one year ago but have stabilized, according to a source that focuses on 20 of the largest cities, or have increased from one year ago, according to sources that cover the whole country. Prices from all sources remain substantially off their peak.

The S&P/Case-Shiller Index for existing home prices was unchanged in March after six straight months of decline, remaining 35 percent below its peak in July 2006 and at the lowest level since then. (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), which has been vacillating since April 2011, climbed 2.2 percent in March; it is 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.) However, NAR data (monitoring individual, unpaired transactions for the entire country), which also have been vacillating for the past year, showed a substantial price increase of 7.8 percent in April. NAR’s data for March also showed strong growth at 5.8 percent. Median prices for existing single-family homes in April stood at $178,000, 20 percent below the peak in 2006.

Median prices for new single-family homes shifted slightly upwards by 0.7 percent in April to $235,700 after a dip of 1.6 percent in March. Prices have seesawed over the past year, and are up 4.9 percent over April 2011 and down just 5 percent from the peak in 2007.

Single-family building permits were up 1.7 percent in April (based on a three-month moving average) to 473,000, the highest monthly permit volume in 23 months. Still, April’s permit numbers are 73 percent below the pre-recession high in November 2005. Single-family starts declined almost 1.2 percent in April (on a three-month moving average) to 481,000; this was the second-straight month of decline after starts reached a 21-month high in February, and they are now 73 percent below the pre-recession high in November 2005.



Sales of new single-family homes
 
increased by 3.3 percent in April, a partial recovery from the 7.3 percent decline of the previous month. Even with such ongoing fluctuations over the past year, sales are up 9.9 percent over April 2011; still, monthly sales volume for the past 24 months remain among the lowest seen since record keeping began in 1963. Sales are now 75 percent below the pre-recession high in July 2005. Inventory increased by 1.4 percent in April, up just slightly from March (which registered the lowest monthly figure since record keeping began) and 16 percent below that of a year earlier.

Sales of existing single-family homes (seasonally adjusted) increased 3.0 percent in April to 4.09 million after two straight months of decline and are almost 10 percent higher than those of a year earlier. Still, April’s monthly sales were 35 percent below the pre-recession high in September 2005. Inventory increased by 8 percent in April and supply rose to 6.6 months, although it is still below the long-term average. The forward-looking NAR Index of Pending Sales (of existing single-family homes, condos, and co-ops) dropped 5.5 percent in April from March’s two-year high—which marked the highest level since the first-time homebuyer credit expired in April 2010.

Multifamily building permits changed little in April, with an increase of less than 1 percent, still reaching a three-and-a-half-year high of 234,000 (based on a three-month moving average). Multifamily housing starts increased almost 4 percent in April to 222,000, their highest level in three and a half years. Existing condo sales increased by 6 percent to 530,000, 10 percent higher than April 2011; even with an increase in inventory, supply decreased from 7.1 months to 6.91 months, just 8 percent below the long-term average.

Foreclosure filings—default notices, scheduled auctions, and bank repossessions—decreased by 5 percent in April from a month earlier to 188,780, according to RealtyTrac, and are down 14 percent from a year earlier. April’s total was the lowest monthly total since July 2007.

Home mortgage rates (30-year fixed) fell in May to 3.80 percent from 3.91 percent in April. May’s rate was the lowest monthly rate since record keeping began in 1971.

Commercial/Multifamily


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Apartment rents and hotel revenue per available room (RevPAR) show continued strong growth with apartment rents now surpassing their pre-recession high; rents in the industrial and office sectors are slowly inching up; retail rents are still declining. Office vacancy and retail availability rates are high but stable, industrial availability is high and inching down, and apartment vacancies are low. First-quarter hotel occupancy improved from a year earlier. Net absorption in the office sector was negative and was low by historical standards in the retail sector; net absorption in the apartment and industrial sectors is the strongest, although still down 21 percent and 16 percent from their historical averages, respectively. Completions in all sectors are extremely low by historical standards, though the apartment sector is the strongest at about one-third the long-term average. 



Office vacancy rates
 
stood at 16.0 percent in the first quarter of 2012, unchanged from the fourth quarter of 2011, according to CBRE. Rents crept higher for the fifth-straight quarter and are up 3.1 percent from a year earlier. Net absorption became negative after almost two years of positive growth, while completions remain low at 9 percent of the long-term average (since 1985).


Retail availability rates
 stood at 13.1 percent in the first quarter of 2012, registering no change from the fourth quarter of 2011 or the same quarter one year earlier, according to CBRE. Rents continued their four-year slide in the fourth quarter and are off 2.1 percent from a year earlier. Net absorption was down from the fourth quarter but positive for the third-straight month, at 1.02 million square feet; completions were down as well and at 8 percent of the long-term average (since 1980).


Industrial availability rates
 stood at 13.4 percent in the first quarter of 2012, continuing their slow but consistent seven-quarter decline; rates are now down 70 basis points from the same quarter a year earlier. Rents edged up but are off 0.4 percent from a year earlier. Net absorption was strong at 24.95 million square feet, although down from the previous quarter; completions were down and only 12 percent of the long-term average (since 1980).



Apartment vacancy rates
 
edged down to 5.1 percent in the first quarter of 2012 after a very slight bump up in the fourth quarter, and are 80 basis points lower than for the same quarter a year earlier. Rents were up 1.2 percent in the first quarter and are 4.9 percent higher than a year earlier. Completions in the first quarter of 2012 were up almost 2 percent and are at 35 percent of the long-term average (since 1994).

Hotel occupancy rates stood at 56.8 percent in the first quarter of 2012, up from 54.7 percent in the same quarter a year earlier, according to Smith Travel Research, while the RevPAR Index was up 7.9 percent from a year earlier.