Summary


ULI Center for Capital Markets and Real Estate
Looking beyond the two elephants in this month’s Barometer that just won’t budge—the high unemployment rate and the weak housing market—there are more than the usual number of positive signs in other sectors. Still, certain indicators continue to decline and even some of the positive gains remain weak when compared to historical trends.

More information can be found throughout the tabs and in the links to the right. To download the November 2010 Barometer click on the PDF icon.

September data from the housing sector remains bleak, although the direction of change has been positive for sales of all types of housing. Building permits and housing starts remain at a fraction of their long-term monthly averages; bank repossessions are at their highest ever for a single-month. Bank repossessions are expected to dip temporarily, if only because lenders have recently called a temporary halt in the foreclosure process to review documents.

The REIT sector and the NCREIF Property Index turned in positive monthly and quarterly returns, and CMBS delinquency rates, although near historic levels, declined after two years of steady monthly increases. Still, commercial property prices continued their downward slide for the third straight month and sales volumes, although continuing to grow, are substantially off from their long-term norm.

Vacancy and rental rates across all commercial investment property types remained stable in the third quarter 2010, continuing the pattern seen in the previous two quarters. With this leveling off, rents among the property types range from 6 percent to 18 percent below their pre-recession peaks. Office absorption was positive for the second straight month; absorption had not previously been positive since the fourth quarter of 2007.

Monthly private sector job growth has remained consistently positive in 2010, a stark and welcome reversal from consistent monthly losses in private sector employment throughout 2008 and 2009. Consumer confidence crept back up while retail sales maintained a healthy growth rate.

Economy


November 2010 Barometer Data

The unemployment rate is stuck on ‘high’ while most other key economic data are crawling in the right direction. Private sector job growth continued in October, third-quarter GDP growth is slightly higher than second-quarter although is still not reflecting any jump-start to the economy, retail sales growth were solid although lower than the previous month’s growth rate, the seesawing consumer confidence index was up this month, and S&P 500 returns remained positive for the second straight month.

The net increase of 151,000 jobs in October includes the creation of 159,000 private sector jobs. Private sector employment has grown by 1.1 million jobs since the beginning of 2010. Declines in October stemmed from small (relative to previous months’) reductions in government employment (5,000 temporary Census workers and 14,000 local government employees were let go), and 26,000 seasonal recreational and entertainment jobs were lost. Employment figures since May have been heavily impacted by the ramp-down of the temporary Census workforce. This impact is almost over as only 1,000 Census workers remained at the end of October, down from a peak of 564,000 in May.

The unemployment rate in September was steady at 9.6 percent.

The advance estimate of the third-quarter 2010 GDP growth is 2.0 percent, up from 1.7 percent in the second quarter. Still, the third-quarter GDP remains substantially below first-quarter’s growth of 3.7 percent, which inspired hope at that time that the economy was taking flight, and below the historical average (since 1970) of 2.9 percent.

The Consumer Confidence Index increased to 50.2 in October after dipping in September to 48.6 but is still a long way from the recession peak of 62.7 in May 2010. Retail sales growth has been healthy for three straight months now, with each monthly growth rate above the long-term average of .4 percent (since 1992). September’s retail sales grew 0.6 percent. Motor vehicles and electronics sales experienced the strongest growth rates while clothing and general merchandise were the weakest.

Inflation, as measured by the Consumer Price Index, barely registered, increasing by 0.1 percent in September, primarily due to increases in gasoline prices and food costs, and little else. Over the last 12 months, the CPI has increased 1.1percent.

October’s S&P 500 index saw positive returns for the second straight month, increasing 3.8 percent, following September’s increase of 8.9 percent. Year-over-year returns are up 16.5 percent as of the end of October.

Real Estate Capital Markets

November 2010 Barometer Data

The real estate capital markets had a fairly encouraging month with most indicators continuing in the positive direction seen in the previous period. Even CMBS delinquencies declined slightly. Still, commercial property prices and property sales volumes remain weak.

The REIT sector saw positive total returns again in October—of 4.7 percent—after an increase of 4.5 percent in September. Total returns for the past year are a healthy 42.8 percent. Total returns for the month by property sector show the highest returns for industrial and lodging/resorts, 11.9 and 9.6 percent total returns, respectively, and the lowest returns for the office sector at 2.7 percent.

CMBS issuance was active in October for the third straight month, according to Commercial Mortgage Alert, with $2.69 billion total issuance. Three multi-borrower deals were priced in October and make up the entire issuance for the month. CMBS delinquency rates, according to Trepp LLC, declined to 8.58 percent in October from September’s rate of 9.05 percent; September’s delinquency rate was the highest rate in the history of the CMBS industry and was reached after two years of steady increases in monthly delinquency rates.

Property sales volumes increased in September to $9.2 billion from $9.0 billion in August, according to Real Capital Analytics, but were still just 60 percent of the monthly average since 2001.

The Moody’s/REAL Commercial Property Price Index declined 3.0 percent in August, the third straight month of decline following two months of increase. (This index is reported monthly as a three-month moving average, with a two-month lag.) Values are down 7.6 percent from a year ago and down 45 percent from the October 2007 peak.

Capitalization rates remained fairly steady at 7.35 percent in September, similar to August’s level of 7.55. Cap rates remain above the 6.39 percent of June 2007, but are just below the historical norm of 7.6 percent (since 2001).

The NCREIF Property Index turned in the third positive quarter in 2010, with total returns of 3.86 percent; total returns for the past year are 5.8 percent. Total returns for the quarter by property sector show the highest returns for apartments, 6.04 percent, and the lowest returns for industrial property, 2.8 percent.

For additional commentary on real estate capital markets, visit the Capital Markets section of Urban Land online.

Commercial/Multifamily

November 2010 Barometer Data

Vacancy and rental rates across all property types are in a stabilizing pattern in the third quarter, continuing a trend seen in the first and second quarters of 2010. With this leveling off, rents are now between 6 percent and 18 percent below their pre-recession peak—apartment rents are down 6 percent from their peak, office rents are down 12 percent, retail rents down 14 percent, warehouse rents are down 15 percent, and the hotel rev/par index is down 18 percent. Vacancy rates for apartments are just above historic norms while rates for all other property types remain well above historic norms.

Office vacancy rates stood at 19.5 percent in the third quarter of 2010, about the same as in the second quarter, and just 50 basis points above the third quarter a year ago, according to Property & Portfolio Research (the source of all data presented in this section). Completions in the third quarter were down as a percentage of inventory, decreasing from 0.2 percent in the first quarter to 0.1 percent; both quarters are substantially below the historical average of 0.7 percent. The absorption of 11.1 million square feet continues the positive absorption first seen in the second quarter after nine quarters of negative absorption. Rents remained stable and are off 3.6 percent from the same quarter a year ago.

Retail vacancy rates stood at 18.8 percent in the third quarter of 2010, down slightly from 19.2 percent in the second quarter and just 20 basis points above the same quarter a year ago. Completions in the third quarter of 2010 as a percent of inventory were 0.1 percent, the same as in the second quarter and below the 0.6 percent historical average. Rents remained stable in the third quarter and are off 4.0 percent from the same quarter a year ago.

Warehouse vacancy rates stood at 13.1 percent in the third quarter of 2010, down slightly from 13.2 percent in the second quarter and 50 basis points above the same quarter a year ago. Completions in the third quarter of 2010 stood at 0.1 percent of inventory, up from virtually no activity in the previous quarter and below the 0.6 percent historical average. Rents stayed about the same and are off 5.9 percent from the same quarter a year ago.

Apartment vacancy rates stood at 7.7 percent in the thrid quarter of 2010, down slightly from the second quarter and 60 basis points below 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 first quarter and are off just .3 percent from the same quarter a year ago.

Hotel occupancy rates (a moving 12-month average) stood at 60.9 percent in the third quarter of 2010, up from 58.4 percent in the same quarter a year ago. Completions were down slightly as a percentage of rooms, from 3.2 percent in third-quarter 2009 to 2.1 percent, now below the historical average of 2.2 percent. The Index of Revenue per Available Room (RevPar Index) was up 9.2 percent from the same quarter of 2009.

Housing

November 2010 Barometer Data

Sales of all types of existing housing and new single-family homes increased at healthy rates in September. Building permits are steady for single-family housing and down for multi-family housing; housing starts increased for single-family housing and declined for multi-family.

Single-family building permits were just about level, registering only a .5 percent increase from 403,000 in August to 405,000 in September; building permit activity in these two months are at the lowest levels since April 2009. Over the past 12 months, monthly single-family permits have bounced between 41 percent and 55 percent of the monthly average (since 1970), with September’s permits at 41 percent.

Multifamily building permits fell in September by 26 percent from 150,000 permits in August to 111,000 in September. Over the past 12 months, monthly multifamily permits have bounced between only 23 percent and 38 percent of the monthly average (since 1970), with September’s permits at 28 percent.

Single-family housing starts increased by 4 percent in September to 452,000, a positive change for the second straight month after a three-month decline. September’s starts are 41 percent of the monthly average (since 1970) for single-family housing starts.

Multifamily housing starts declined by 7 percent, following a 56 percent increase in August. Multifamily housing starts in September stood at 150,000, representing 42 percent of the monthly average (since 1970). September starts were the second highest since February 2009; August’s were the highest.

Prices for new homes were up slightly in September at $223,800, compared to August’s prices of $220,500.

The S&P/Case-Shiller Index for existing home prices barely changed, but it notched downward after four straight months of decline; the August index is now just 1.7 percent higher than it was 12 months earlier. (This index is reported monthly as a three-month moving average, with a two-month lag.) Data from the National Association of Realtors (NAR) showed existing single-family home prices down by 3 percent in September after a decline of 2.7 percent in August; prices are now 1.9 percent below where they were in September 2009. Prices of existing condominiums fell in September, according to NAR, and are 6.2 percent lower than last September. Housing affordability remains near historic highs.

The number of existing single-family home sales (seasonally adjusted) increased by almost 10 percent in September, following an increase of 7 percent in August. Together, these two months go far in reversing the decline that started in May, immediately after the expiration of the homebuyer tax credit. Still, September’s sales of 3.97 million existing homes were at a low not seen since 1997, and monthly supply now stands at 10.2 months. Existing condo sales increased 9.8 percent to 560,000 and monthly supply stepped down slightly from 14.5 months to 14.0 months. New single-family home sales (seasonally adjusted) increased by 7 percent to 307,000 in September, following a slight up-tick in August; these two months of growth follow a decline of 30 percent between April and July. Sales of new single-family homes in May, June, July and August were at the lowest level since records began in 1963. With an increase in sales and a slight decline in inventory, the supply decreased to 8.0 months from 8.6 months.

Foreclosure filings—default notices, scheduled auctions, and bank repossessions—increased 2.5 percent in September, according to RealtyTrac. The increase was due primarily to a 6.1 percent increase in default notices and a 7.1 percent increase in bank repossessions. RealtyTrac notes that September was the first month in which the number of bank repossessions exceeded 100,000 in a single month. A dip in repossession is expected soon as lenders are now reviewing foreclosure documents to correct any irregularities.

Home mortgage rates (30-year fixed) remained very low, and were at 4.23 percent in September.