It has taken a while to get here but the current month-to-month data provide heartening news, while a few other data items paint a picture of slow but steady improvement—altogether a more pleasing view than a year ago. Still, an unsettling dose of stubborn issues remain. Compared with one year ago, 53 percent of 59 key indicators in the Barometer were better, 39 percent were worse, and 8 percent were unchanged.
Note: More commentary and data can be found throughout the tabs and in the accompanying tables.
In economic news, private job creation was strong and more broad- based in February than has been the case since job growth turned positive this past year; consumer confidence is up and retail sales are strong and exceed the pre-recession peak; and the S&P 500 returns remained positive for the sixth-straight month. Still, the fourth-quarter GDP was revised downward to below the long-term quarterly average, the increase in the CPI partially reflects growing fears of disruption of our Middle East oil supply, and the jump in public sector job loss is a particularly disturbing hindrance to net job creation.
In capital markets, CMBS issuance in February was at its highest level in more than two years, and almost all the issuance was for multiborrower deals and the REIT sector turned in steady positive monthly returns. Still, commercial property sales volumes dropped in February, prices were mixed and remain below peak values, and the CMBS delinquency rate reached a new high yet again.
In the housing sector, single-family housing starts declined in January and remained near historically low levels but multifamily starts were at their highest levels since February 2009, although at only 48 percent of their long-term monthly average. Home prices for both new and existing homes are down again. New single-family home sales remain historically low and slipped even lower. Sales of existing single-family homes are a bright spot, but the rise of cash-only sales is causing concern about investor reentry into this market. Still, pending sales of all types of existing homes declined slightly for the second-straight month and foreclosures have started to edge up again after a four-month decline.
Private sector employment growth was strong and broad in February, but this strong showing may be due in part to January’s weather-related weakness. Even at February’s level of growth, it would take almost three years to create the number of jobs lost over the past three years. A slow but steady pace is further suggested by the latest GDP estimates. Still consumer confidence and retail sales are up.
A net increase of 192,000 jobs in February was due to an increase of 222,000 private sector jobs (primarily in durable goods manufacturing, health care, employment services, and specialized trade contractors) and the loss of 30,000 government jobs (primarily in state and local government). A total of 1.27 million jobs in all sectors have been created since February 2010—still a fraction of the net total of 7.48 million lost over the past three years.
The unemployment rate continued to move in the right direction, falling from 9.0 percent in January to 8.9 percent in February. January’s unemployment rate is the lowest since April 2009.
The revised estimate of fourth-quarter 2010 GDP growth is 2.8 percent, disappointingly lower than the advance estimate of 3.2 percent and lower than the long-term quarterly average of 2.9 percent.
The Consumer Confidence Index rose for the second-straight month from 64.6 in January to 70.4 in February. It is now at 81 percent of January 2008’s level of 87.3. Retail sales rose 0.3 percent in January, the seventh-straight month of growth. January’s growth rate is 75 percent of the long-term monthly average of 0.4 percent (since 1992), although actual retail sales volume—$381.6 billion—exceeds, albeit marginally, the pre-recession peak of three years ago ($379.8 billion in November 2007).
Inflation, as measured by the Consumer Price Index, was 0.4 percent in January, as it was in December; this is the highest monthly inflation rate since June 2009 and the same as the long-term monthly average of 0.4 percent (since 1970). January’s increase was due primarily to energy commodities (as fears about unrest in the Middle East grew), and food; other apparel, shelter, airline fares and recreation all posted increases as well. Over the past 12 months, the CPI has risen 1.6 percent.
February’s S&P 500 index saw positive returns of 3.4 percent, the sixth-straight month of increases. Year-over-year returns were a healthy 22.6 percent at the end of February, little changed from 22.2 percent at the end of February—both above the long-term 12-month average of 10.3 percent.
Real Estate Capital Markets
Returns and CMBS multiborrower deals are the good news in the real estate capital markets this month, while commercial property prices continued to show mixed results, sales volumes dropped, and CMBS delinquencies continue to rise.
CMBS issuance jumped in February to its highest level since December 2008, according to Commercial Mortgage Alert, with $5.2 billion total issuance, almost all due to three multiborrower deals. CMBS delinquency rates, according to Trepp LLC, increased to 9.39 percent in January, another record high.
Commercial property sales volume in January dropped to $7.8 billion from December’s three-year monthly high of $25.6 billion, according to Real Capital Analytics. January’s volume was 50 percent of the monthly average since 2001. From May through November, monthly volumes had ranged from almost 60 percent to 70 percent of the historic monthly average or $9.1 billion to $10.9 billion. Forty-three percent of total sales volume was in the office sector, while 25 percent was in apartment sales. Even with lower sales volume, it is interesting to note that of the office sales most were in suburban areas, whereas in the previous month most offices sales were in CBDs.
The Moody’s/REAL Commercial Property Price Index continued a yearlong zigzag pattern, declining 0.9 percent in December after a scant 0.6 percent increase in November. November had been the third month in a row of increases, albeit at successively smaller rates, after three straight months 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 58 percent of the peak value in October 2007. The Green Street Advisors’ Commercial Property Price Index, based on monthly estimates of private market value for REIT portfolios, rose 1.1 percent in February, following on increases of 2.1 percent in November, 0.8 percent in December, and 0.3 percent in January. It is now at 83 percent of its peak value in August 2007.
The REIT sector saw positive total returns in February of 4.6 percent, up slightly from January’s returns, and total returns for the past year remain very healthy at 39.5 percent. Total returns for the month by property sector range from 8.2 percent for the industrial sector and 6.5 percent for the retail sector to –0.1 percent for the lodging/resort sector.
As reported in last month’s Barometer, the NCREIF Property Index turned in a positive fourth quarter in 2010, with total returns of 4.62 percent, making 2010 a full year of consistently positive returns; total returns for the past year are 13.1 percent. Total returns for the quarter by property sector show the highest returns for apartments, 6.29 percent, and the lowest returns for lodging/resorts, 3.35 percent, and industrial property, 3.42 percent.
Capitalization rates, as reported by Real Capital Analytics (RCA), remained fairly steady at 7.27 percent in January, similar to December’s level of 7.28 percent. RCA’s 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, capitalization rates reported by NCREIF remained steady at 6.30 percent in the fourth quarter of 2010, similar to the third quarter’s level of 6.47 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.
Multifamily starts were at their highest monthly level since February 2009 while single-family starts continued to decline. Permits, sales, and prices of new single-family homes retreated from their recent two- and three-month gains, and even at those recent higher levels, they remain at historically low levels. Prices of existing single-family homes remain depressed, though sales exceeded their long-term monthly average for the second-straight month. The forward-looking National Association of Realtors (NAR) Index of Pending Sales (of existing single-family, condos, and co-ops) declined 2.8 percent in January after a 3.0 percent decline in December.
Single-family building permits decreased 5 percent from 442,000 in December to 421,000 in January after a 9 percent increase over the previous two months. January’s permits are now 43 percent of the historical monthly average (since 1970) and 23 percent of the pre-recession high of September 2005. Single-family starts decreased almost 1 percent from 417,000 in December to 413,000, the second straight month of decline, and are now 38 percent of the monthly average (since 1970) and 21 percent of the pre-recession high of January 2006.
Sales of new single-family homes decreased 13 percent to 284,000 in January after a 16 percent increase over the previous two months, and supply increased from 7.0 months to 7.9 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 down 2 percent in January to $230,600 after a 15 percent increase over the previous three months. December’s price of $235,000 had been the highest monthly price since July 2008.
The number of existing single-family home sales (seasonally adjusted) increased by 2 percent to 4.69 million in January, almost 20 percent above the long-term monthly average (since 1970); monthly supply decreased from 7.9 to 7.5 months. The S&P/Case-Shiller Index for existing home prices notched downward for the fifth-straight month; the December index is down 31 percent from the peak in July 2006. (This index is reported monthly as a three-month moving average, with a two-month lag.) NAR data show prices for existing single-family homes dropped 6 percent in January following six months of more moderate monthly declines; prices are down 28 percent from the peak in 2006.
Multifamily building permits declined by 22 percent to 125,000 in January after a 50 percent increase in December had brought permits to their highest level since January 2009. Multifamily permits are now at 32 percent of the monthly average (since 1970). Multifamily housing starts increased by 80 percent in January. Multifamily housing starts in January stood at 171,000, representing 48 percent of the monthly average (since 1970). Existing condo sales increased 5 percent to 670,000, which is almost 20 percent above the long-term monthly average (since 1970), and monthly supply dropped from 10.1 months to 7.9 months. Prices of existing condominiums declined 6 percent in January, according to NAR, and are down 32 percent from the peak in 2007.
Housing affordability remains near historical highs.
Foreclosure filings—default notices, scheduled auctions, and bank repossessions—increased 1.4 percent in January from a month earlier to 261,333, according to RealtyTrac; filings are 17 percent lower than one year ago. The firm attributes January’s relatively small increase and 26 percent declines between September and December to lenders and servicers slowing the foreclosure process to correct any irregularities in foreclosure processes and documents; foreclosure activity is expected to resume at some point.
Home mortgage rates (30-year fixed) edged up from 4.76 percent in January to 4.95 percent in February, continuing a rising pattern over the past four 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.
Vacancy and rental rates across all property types continued to stabilize, and vacancies actually declined in several sectors in the fourth quarter 2010. Rents are now between 5 and 16 percent below their pre-recession peak: apartment rents are down 5 percent from their peak, office rents are down 12 percent, retail rents are down 15 percent, the hotel revenue per available room (RevPAR) index is 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 fourth quarter of 2010; after a sustained vacancy rate of 18.9 percent in the previous three quarters, the vacancy rate has now returned to where it was in the fourth quarter a year ago, according to Property & Portfolio Research (the source of all data presented in this section). Completions in the fourth quarter, as a percentage of inventory, were 0.1 percent, the same as in the third quarter; this is substantially below the historical average of 0.7 percent. The absorption of 17.6 million square feet of space is almost triple the absorption of the previous quarter and continues the positive absorption first seen in the second quarter after seven consecutive quarters of negative absorption. Rents remained stable and are off just 1.5 percent from the same quarter a year ago.
Retail vacancy rate stood at 18.4 percent in the fourth quarter of 2010, down slightly from 18.8 percent in the third quarter and 80 basis points below the figure for the same quarter a year ago. Completions in the fourth quarter of 2010 as a percentage of inventory were 0.1 percent, the same as in the previous quarter and below the 0.6 percent historical average. Rents remained stable in the fourth quarter and are off 3.8 percent from the same quarter a year ago.
Warehouse vacancy rate stood at 12.2 percent in the fourth quarter of 2010, barely changing from 12.3 percent in the third quarter and 10 basis points below the figure for the same quarter a year ago. Completions in the fourth quarter of 2010 stood at 0.1 percent of inventory, the same as in the previous quarter and below the 0.6 percent historical average. Rents stayed about the same and are off 4.5 percent from the same quarter a year ago.
Apartment vacancy rate stood at 7.6 percent in the fourth quarter of 2010, the same as in the third quarter but 80 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 fourth quarter and are 1.9 percent above rents from the same quarter a year ago.
Hotel occupancy rates (a moving 12-month average) stood at 61.8 percent in the fourth quarter of 2010, up from 57.9 percent in the same quarter a year ago. Completions were down slightly as a percentage of rooms—from 3.1 percent in the fourth-quarter of 2009 to 1.7 percent—and are now below the historical average of 2.3 percent. The RevPAR Index was up 9.8 percent from the same quarter of 2009.