Robust employment growth dominates this month’s Barometer economic data, seesawing continues in the capital markets, property fundamentals are somewhat improved, and the weak housing data stay very weak. Overall, 54 percent of key indicators in the Barometer are worse than they were one year ago, 44 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 had two faces. First-quarter 2011 GDP growth was disappointingly weak whereas employment growth in April was encouragingly strong. Still, if job growth were to continue at this pace, it would take 2.5 years to replace the jobs lost in the recession. Among the unknowns are the long-term impacts of government spending and employment cutbacks. Other monthly indicators were up at the start of the second quarter, including retail sales, consumer confidence, and S&P returns.
The real estate capital markets slowed down, except in the REIT sector and the NCREIF Property Index, which turned in solid monthly and quarterly returns, respectively . Property sales fell substantially from the previous month. CMBS issuance was down and the CMBS delinquency rate reached a new high yet again. Commercial property price changes were mixed.
Vacancy rates in the first quarter of 2011 moved down slightly in the apartment, retail, and warehouse sectors while office vacancies remained unchanged. Rental rates remained about the same across all sectors and are now between 4 percent (apartments) and 16 percent (warehouse space) below their pre-recession high.
Office absorption was much lower than in the last quarter and was 84 percent below its pre-recession high. Newly completed space in all sectors was the lowest or among the lowest of quarterly completions in the past 30 years.
In housing news, foreclosure activity is on the rise again after a six-month stretch of monthly declines. Permits and starts of all types of homes were up in March. Sales of existing single-family homes and condominiums increased and are substantially above their long-term averages, while sales of new single-family homes increased but remain historically low. Price indices for existing homes were down for February while median sales prices for new and existing homes were up in March but remain depressed. Pending home sales continue to rise.
The economy provided mixed but generally good signals during April. While first-quarter 2011 GDP growth fell to just over half its long-term average. employment growth was robust and double the long-term monthly average. If this pace were sustained, it would take 2.5 years to recoup the jobs lost in the past three years. Retail sales were strong, consumer confidence grew, and S&P 500 returns were solid.
A net increase of 244,000 jobs in April was due to an increase of 268,000 private sector jobs (primarily in retail trade, leisure and hospitality, health care, and professional and technical services) and the loss of 24,000 government jobs (primarily in local and state government, but also in the U.S. Postal Service). A total of 1.59 million jobs have been created since April 2010—only 23 percent of the net total of 6.97 million lost over the past three years.
The unemployment rate in April reversed its recent dip and climbed back up to 9 percent. March’s unemployment rate had been the lowest in two years.
The advance estimate of first-quarter 2011 GDP growth is 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 rose 2.5 percent from 63.8 in March to 65.4 in April after a one-month dip. It is now at 75 percent of January 2008’s level of 87.3. Retail sales rose 0.4 percent in March, the ninth-straight month of growth. March’s growth rate was the same as the long-term monthly average (since 1992). Actual retail sales volume—$389.2 billion—exceeds the pre-recession peak of three years ago ($379.8 billion in November 2007) by 2.5 percent.
Inflation, as measured by the Consumer Price Index, was 0.5 percent in March, the same as in February; this is the highest monthly inflation rate since June 2009 and above the long-term monthly average of 0.4 percent (since 1970). March’s increase was due primarily to energy commodities, but food, airline fares, medical care, and vehicles all contributed as well. Over the past 12 months, the CPI has risen 2.7 percent.
April’s S&P 500 returns were a solid 2.96 percent, providing eight-straight month of positive activity, and an improvement over last month’s infinitesimal return. Year-over-year returns were 17.2 percent, above the long-term 12-month average of 10.3 percent.
Real Estate Capital Markets
Returns are the good news in the real estate capital markets this month, while commercial property prices showed mixed results, sales volumes and CMBS issuance declined, and CMBS delinquencies continue to rise.
CMBS issuance remains active but fell sharply in April to $0.89 billion from $3.37 billion in March and $5.18 billion in February, according to Commercial Mortgage Alert. February’s volume was the largest for a month since December 2007. One multiborrower deal was priced in April, bringing the total to six in 2011 so far. CMBS delinquency rates, according to Trepp LLC, increased to 9.65 percent in April, another record high.
Commercial property sales volume
increased to $9.8 billion in March from $6.5 billion in February, according to Real Capital Analytics, after two months of decline. March’s volume was 63 percent of the historical monthly average (since 2001). Office buildings accounted for 44 percent of total sales volume in March and apartment buildings for 31 percent. According to Real Capital Analytics, the most active sales markets to date in 2011 are, in descending order, Manhattan, Los Angeles, Washington, D.C., San Francisco, Boston, District of Columbia–Virginia suburbs, San Diego, Dallas, and Phoenix. Over $1 billion in transactions was recorded in each of these cities in the first quarter of this year.
The Moody’s/REAL Commercial Property Price Index continued its yearlong zigzag pattern, declining 3.26 percent in February, the third-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 45 percent from the peak value in October 2007 and down 4.9 percent from a year ago.
The Investment Grade Index of the CoStar Commercial Repeat-Sale Indices barely declined 0.3 percent in February, but it is the fourth-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 35 percent from the peak value in June 2007 but up 6.8 percent from a year ago. The General Grade Index of the CoStar Commercial Repeat-Sale Indices increased very slightly at 0.8 percent for the second-straight month, but is still down almost 29 percent from peak value in February 2008 and down almost 11 percent from last year.
The Green Street Advisors’ Commercial Property Price Index, based on estimates of private market value for REIT portfolios, was up almost 2 percent in April and is now down only 13 percent from the peak value in August 2007.
The REIT sector saw positive total returns in April of 5.1 percent after a dismal March, and although total one-year returns declined to 22.9 percent from 25.0 percent in March, they remain very healthy. Total returns for the month by property sector range from 2.3 percent for the industrial sector to 6.9 percent for the office sector.
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.
Capitalization rates, as reported by Real Capital Analytics, declined slightly to 7.24 percent in March from February’s 7.35 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.
Multifamily starts increased in March after a dramatic fall in February, and permits, starts, sales, and prices of new single-family homes all improved in March but remain at historically low levels. Prices of existing single-family homes remain depressed but sales increased and exceeded their long-term monthly average for the fifth-straight month.
The S&P/Case-Shiller Index for existing home prices declined 1.1 percent, notching downward for the seventh-straight month; the February index is 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) fell 1.6 percent, the fourth-straight month of decline, and it is now down 19 percent from the peak in April 2007. (The HPI covers the entire country and is reported monthly with a two-month lag). NAR data for February showed a 1.0 percent decline for existing single-family home prices but in March prices increased by 2.3 percent; median prices for existing single-family homes stood at $160,500, down 28 percent from the peak in 2006. Median prices for new single-family homes rose 2.9 percent in March to $213,800, down 14 percent from the peak in 2007.
Single-family building permits increased 6 percent from 383,000 in February to 405,000 in March. March’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 18 percent from 392,000 in February to 422,000, after three straight months of decline, and are now at 39 percent of the historical monthly average (since 1970) and 23 percent of the pre-recession high of January 2006.
Sales of new single-family homes
increased 11 percent to 300,000 in March after two-straight months of sharp declines, and supply decreased from 8.2 months to 7.3 months. Monthly sales of new single-family homes since May have been at lows not seen since record keeping began in 1963.
The number of existing single-family home sales (seasonally adjusted) increased by almost 4 percent to 4.45 million in March after a 10 percent decline in February, and is 13 percent above the long-term monthly average (since 1970); monthly supply decreased from 8.4 to 8.1 months. The forward-looking National Association of Realtors (NAR) Index of Pending Sales (of existing single-family homes, condos, and co-ops) increased 5.1 percent in March, following a 2.1 percent increase in February.
Multifamily building permits increased by 28 percent to 173,000 in March and are now at 44 percent of the monthly average (since 1970). Multifamily housing starts increased by 15 percent in March. Multifamily housing starts in March stood at 117,000, representing 33 percent of the monthly average (since 1970). Existing condo sales increased almost 2 percent to 650,000, a level that is almost 15 percent above the long-term monthly average (since 1970), but with a large increase in inventory, monthly supply increased from 9.7 months to 10.1 months.
Housing affordability remains near historical highs.
Foreclosure filings—default notices, scheduled auctions, and bank repossessions—increased by almost 7 percent in March from a month earlier to 239,795, according to RealtyTrac; filings are 35 percent lower than one year ago. The firm expected a rise in foreclosure filings at some point this year, following declines that began in September as lenders and servicers sought to correct any irregularities in those processes and documents.
Home mortgage rates (30-year fixed) remained steady at 4.84 percent in April.
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 (0.66 percent) in the first quarter and are 2.8 percent above rents of the same quarter a year ago.