Commercial property returns slowed but buyer appetite remained steady as prices stayed at three-and-a-half-year highs, transaction volume remained above the long-term average, and cap rates stayed low. Permits and starts are at four-year highs for both single-family and multifamily housing; new homes sales jumped to a three-year high. The economy continued on a consistent track; consumers provided a surprise, registering their highest confidence level in five years, and retail sales were boosted by the release of the IPhone 5.
Significantly, 85 percent of the key indicators in the Barometer are better than a year ago. At this time last year (November 14, 2011), only 65 percent of the key indicators were better than a year earlier.
Note: More commentary and data can be found throughout the tabs and in the accompanying tables.
(Hurricane Sandy, which had little, if any, impact on this month’s data, is likely to make its presence felt in next month’s Barometer.)
The top ten trends in this month’s Barometer:
- Employment growth continued within a narrow band of 150,000 to 190,000 jobs for the fourth-straight month, providing a steady advance. The unemployment rate, essentially unchanged, is below 8 percent for the second-straight month; the rate had been above 8 percent for almost three years.
- The third-quarter GDP growth rate showed improvement over the second quarter, though it remains lackluster.
- The Consumer Confidence Index reached its highest level in almost five years. Total retail sales were up, with electronics sales jumping on the release of the Apple iPhone 5 and gasoline prices rising substantially.
- The steady pace of cap rate compression has flattened or is continuing, depending on the data source. Regardless, cap rates remain low (a sign of strength in the commercial real estate market), although competition for trophy properties may be easing.
- Commercial property transaction volumes were off from the previous month and from one year ago, but still exceeded the long-term monthly average. Prices barely moved or improved slightly, depending on the data source, but are at or near three-and-a-half-year highs.
- NCREIF property returns were up in all sectors in the third quarter; total returns have been positive for the past seven quarters, but the rate of growth has slowed. Total REIT returns in October were negative for the second-straight month, but mixed by sector.
- CMBS issuance was off from the previous month’s spike but remains above $4 billion; delinquencies continued to decline from their all-time high in July.
- Permits and starts are at four-year highs for both single-family and multifamily housing. Sales of new single-family homes are at a three-year high.
- New foreclosures were at a five-year low, but varied considerably by state.
- Prices of existing homes continue to rise at relatively healthy rates, according to two sources on repeat sales, although growth is more subdued than the exuberant rates of spring and early summer. According to one source for unpaired transactions, prices declined; those data include distressed homes sold at deep discounts.
(For annual projections of key Barometer indicators, see the new ULI Real Estate Consensus Forecast).
Monthly employment growth has now stayed within a band of 150,000 to 190,000 jobs for four straight months, constituting steady but plodding growth. An uptick in unemployment in October was considered a negligible change by BLS. The third-quarter GDP growth rate showed improvement over the second quarter, although it remains lackluster. Consumer confidence is the star and retail sales were strong. The manufacturing sector sustained its recovery from its summer contraction. Private construction stepped up a bit after a pause in August.
Net job growth in October of 171,000 jobs was made up of 184,000 new private sector jobs and the loss of 13,000 public sector jobs. Net growth for September was revised upward to 148,000. The country has 4.3 million fewer jobs than it did almost five years ago. At October’s growth rate, it would take about two years to regain just those 4.3 million jobs. The greatest private sector job gains in October by far were in professional and business services, retail trade, health care, and leisure/hospitality. The overall unemployment rate in October shifted to 7.9 percent from 7.8 percent in September, keeping it below 8.0 percent for the second time since the beginning of 2009. The slight shift this month was due to higher labor force growth relative to household employment growth.
The first estimate of third-quarter GDP growth is 2.0 percent, up from 1.3 percent for the second quarter. First-quarter GDP growth was also 2.0 percent. The increase in the third quarter primarily reflects contributions from personal consumption expenditures, federal government spending, and residential fixed investment, which were partly offset by negative contributions from exports, nonresidential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.
The Consumer Confidence Index improved 3.8 points in October to 72.2, putting it at its highest level in almost five years. Total retail sales in September were up 1.1 percent, boosted by electronics sales that jumped with the release of the Apple iPhone 5 and a substantial increase in gasoline prices. In fact, sales rose in all major categories with the exception of department stores. Retail sales of $412.9 billion are 5.4 percent higher than those of a year earlier but exceed the pre-recession peak of $378.4 billion (in November 2007) by only 9.1 percent.
The value of private construction increased 1.3 percent in September, after almost no growth in August, and it is now 14.4 percent higher than a year ago. Public construction put in place declined 0.8 percent and is now off 4.2 percent from a year earlier. September’s total construction value of $851.6 billion is down 30 percent from the pre-recession high in March 2006, with private construction down 40 percent.
Inflation, as measured by the Consumer Price Index, rose 0.6 percent for the second-straight month; 0.6 percent is the largest monthly increase in over three years. The increases in August and September were due primarily to a rise in the gasoline index—9.0 percent and 7.0 percent, respectively. For the past 12 months, the CPI has risen 2.0 percent, the highest 12-month change since April.
Monthly S&P 500 returns were -1.85 percent in October but year-over-year returns are positive at 15.2 percent.
The Purchasing Managers’ Index improved in October, moving to 51.7 percent from 51.5 percent in September, according to the Institute for Supply Management. The figures for October and September indicate a generally expanding manufacturing sector, whereas the levels for June, July, and August had indicated contraction.
Real Estate Capital Markets
The steady pace of cap rate compression has flattened or is continuing, depending on the data source, but regardless, cap rates are low although competition for trophy properties may be easing. Total transaction volume was off slightly from the previous month and from one year ago but exceeds the long-term monthly average. Prices barely moved or improved slightly, depending on the data source, and are at or near three-and-a-half-year highs. NCREIF returns were positive for the third quarter, constituting seven straight quarters of growth, though the growth rate is slowing. NREIT total returns were negative for the second-straight month. CMBS issuance was off, and delinquencies continued to decline.
Capitalization rates, as reported by Real Capital Analytics (RCA), were 6.86 percent in September, unchanged from August. The essentially steady cap rate compression seen since mid-2011 appears to be flattening out; the past four months have shown very little movement, with consistently minimal, albeit upward, changes in June, July, and August. As reported by NCREIF, the capitalization rate continued to compress in the third quarter, slipping from 5.96 percent in the second quarter of 2012 to 5.88 percent in the third quarter.
Commercial property sales volumes (excluding land and hotels) declined by 7 percent to $17.2 billion, according to RCA. This is the second-straight month of decline, continuing the zigzag pattern of the past 12 months, but September’s volume still exceeds the monthly long-term average (since 2001). Transactions declined in all sectors with the exception of retail. Compared with September 2011, transactions are off by 3.4 percent, with all sectors down except for apartments.
The Moody’s/RCA Commercial Property Price Index barely changed in August, up 0.2 percent—not enough to recover from July’s decline of 1.40 percent. June’s index level was the highest since January 2009. (This is a same-property index based on all U.S. transactions over $2.5 million.) Values are now down 23 percent from the peak value in December 2007 and are just 5.9 percent higher than a year ago.
The new value-weighted composite CoStar Commercial Repeat-Sale Index rose 1.6 percent in August and is up 11.4 percent from a year ago. The index was at its highest in August since the beginning of 2009. (This index is based on a repeat-sales methodology that tracks transactions over $100,000 and includes land sales.) Values are down 18 percent from the peak value in September 2007.
The NCREIF Property Index turned in a positive third quarter with total returns of 2.3 percent, sustaining the consistently positive returns of the past two and a half years, but at a slowing growth rate over the past seven quarters. The capital appreciation component was 0.92 percent for the quarter, the lowest it has been since appreciation turned positive in mid-2010. Total 12-month returns are now 11.0 percent. Returns for the quarter by property sector were all between 2.1 percent and 2.4 percent.
Total equity REIT returns were down at –0.84 percent in October, negative for the second straight month. For individual core sectors, returns were negative for the industrial, office, and lodging/resorts sectors, at –1.4 percent, –2.2 percent, and –8.1 percent, respectively. Returns were positive for the apartment and retail sectors, at 0.6 percent and 0.2 percent, respectively. One-year total returns as of October stood at 14.9 percent, with one-year returns reaching 24.2 percent in the retail sector and 21.8 percent in the industrial sector. Lodging/resorts and apartments had the lowest one-year returns at 6.1 percent and 5.6 percent, respectively.
CMBS issuance fell to $4.1 billion in October after September’s vault to $5.9 billion made it the highest monthly volume since 2007. While it is unclear the extent to which Hurricane Sandy affected total issuance for the month, October’s level is still the fifth month out of the last six with volumes above $4 billion, according to Commercial Mortgage Alert. According to Trepp LLC, CMBS delinquency rates dropped to 9.69 percent in October. After peaking at an all-time high of 10.34 percent in July, delinquency rates have declined for three straight months; the bulk of the five-year loans securitized in 2007 have passed their maturity date, and loan resolutions and loan cures continue to put downward pressure on the delinquency rate.
As reported in last month’s Barometer, bank real estate loan delinquency rates continued to fall in the second quarter. Commercial and multifamily mortgage delinquency rates are now 3.34 percent and 2.03 percent, respectively. Construction and development loans have the highest delinquency rate at 10.81 percent, more than double the quarterly historical average (since 1991) of 5.3 percent.
Prices of existing homes continue to rise at relatively healthy rates, according to two sources of repeat sales, although growth is more subdued than in the exuberant spring and early summer. According to one data source on unpaired transactions, prices declined; those data include distressed homes sold at deep discounts. Sales of existing homes slipped. For new single-family homes, prices slipped and sales rose. Permits and starts are at four-year highs for both single-family and multifamily housing. New foreclosures were at a five-year low, but varied considerably by state.
Existing single-family home prices rose for the sixth-straight month, according to the S&P/Case-Shiller Index (which tracks repeat sales in 20 cities), with an 0.88 percent increase in August. Growth has progressively slowed over the past two months from the highest rates since mid-2004 registered in May and June. Still, growth in August was healthy—over three times higher than the long-term monthly average (since 2000)—and prices are now up 2.0 percent from a year ago. Still, prices are down 29 percent from their peak in July 2006. The Federal Housing Finance Agency House Price Index (HPI) for existing single-family home prices (tracking repeat sales in the entire country) rose for the seventh-straight month, moving up just a bit—0.25 percent in August—after an even smaller increase in July. Growth has slowed considerably since March, April, and May, when the monthly increases were the largest in 21 years, and in June. Still August’s growth rate approximates the long-term monthly average (since 1991), and prices are now up 4.8 percent from a year ago. Still, the index is 15 percent lower than its peak in June 2007.
Existing single-family home prices (based on individual, unpaired transactions for the entire country), as tracked by the National Association of Realtors (NAR), slipped by 0.6 percent, the third-straight month of decline. The pattern of the past three months is in marked contrast with the substantial increases for March through June, which accounted for the longest sustained period of strong price growth in over 40 years—totaling a whopping 21 percent. Median prices for existing single-family homes stood at $184,300 in September, 11.4 percent higher than one year ago. Prices are now 17 percent below the peak in 2006.
New single-family home prices were down 3.2 percent in September. At the same time, the reported 11.2 percent increase in August was revised downward to a 5.8 percent increase. Still, September’s price of $242,400 is up almost 12 percent from September 2011 and just 2 percent below the 2007 peak.
Single-family building permits were up 3.6 percent in September (an annual rate based on a three-month moving average) to 522,000. The number of permits has increased each of the past 17 months and is at its highest level in four years (since September 2008). Still, this September’s permit numbers are 70 percent below the pre-recession high in November 2005. Single-family housing starts increased 4.6 percent in September (on a three-month moving average) to 551,000 and are now at their highest level in almost four years (since October 2008); starts are 69 percent below the pre-recession high in November 2005.
Sales of new single-family homes rose by 5.7 percent in September to 389,000. Even with the zigzagging of monthly sales over the past year, September’s volume is up 27 percent from September 2011 and is the highest monthly sales volume in three years (since October 2009). Still, monthly sales volumes are 72 percent below the pre-recession high in July 2005. Inventory remained unchanged in September, staying at the lowest monthly figure since record keeping began (1970).
Sales of existing single-family homes (seasonally adjusted) slipped almost 2 percent in September to 4.2 million, still 11 percent higher than those of a year earlier and the second-highest monthly level (behind August) since May 2010. September’s monthly sales were 34 percent below the pre-recession high in September 2005. With a 4 percent decrease in inventory, supply fell slightly to 5.8 months, lower than the historical average. The forward-looking NAR Index of Pending Sales (of existing single-family homes, condos, and co-ops) inched up ever so slightly in September—by 0.3 percent—to 99.5, continuing the monthly zigzagging seen since the beginning of 2012. The index has stayed within a narrow range of 99.2 to 101.9 over the past five months.
Multifamily building permits jumped 9.6 percent to 286,000 in September (based on a three-month moving average), the highest level since August 2008. Multifamily housing starts were up 7 percent in September to 226,000, the second-straight month of strong growth after three months of retreat, and are now at their highest level since November 2008.
As reported in last month’s Barometer, the rent index for apartments, calculated quarterly by CBRE, was up 1.1 percent in the second quarter of 2012 to $1,293, which is 5.0 percent higher than a year earlier. Apartment vacancy rates, reported quarterly by CBRE, edged down to 4.8 percent in the second quarter of 2012, continuing a fairly consistent two-and-a-half-year slide.
Existing condo sales of 540,000 in September were unchanged from August, but are 12.5 percent higher than in September 2011 and 11 percent above the long-term monthly average (since 1989). Inventory increased by 6 percent in September but remains substantially lower than one year ago—off 31 percent—and 21 percent below the long-term monthly average; supply increased from 6.0 months to 6.3 months.
New foreclosure filings—default notices, scheduled auctions, and bank repossessions—fell 7 percent from a month earlier to 180,427, according to RealtyTrac. September’s total new filings are down 16 percent from a year earlier and are at their lowest monthly level since July 2007. RealtyTrac noted that several judicial foreclosure states (states in which courts oversee the foreclosure process)—including Florida, Illinois, Ohio, New Jersey, and New York—“continued to buck the national trend, registering substantial year-over-year increases in foreclosure activity in September,” as deferred activity rebounds. RealtyTrac further notes that the national decrease in September was driven mostly by sizable declines in the nonjudicial foreclosure states such as California, Georgia, Texas, Arizona, and Michigan.
Home mortgage rates (30-year fixed) fell slightly from 3.47 percent in September to 3.38 percent in October. October’s rate was the lowest monthly rate since record keeping began in 1971.
Apartment rents continue to climb past their pre-recession highs, and hotel RevPAR is now back at its pre-recession high; rents in the industrial and office sectors are slowly inching up, but retail rents are still declining. Office vacancy rates moved down closer to their long-term average, retail and industrial availability rates remain high but are inching down, and apartment vacancies are low and moving lower. Second-quarter hotel occupancy improved from a year earlier. Net absorption doubled in the apartment sector and was strong in the office and industrial sectors; retail absorption remained improved but remained weak by historical standards. Completions in all sectors are extremely low by historical standards, with the exception of the apartment sector, which is at about four-fifths of the long-term average.
Office vacancy rates
edged down to 15.7 percent in the second quarter of 2012 from 16.0 percent in the first quarter, according to CBRE. This was the first time in three years that vacancy rates have been below 16 percent. Rents crept up 1.3 percent, the sixth-straight quarter of rent growth, and are up 2.8 percent from a year earlier. Net absorption was 12.7 million square feet, the largest quarterly gain in five years, while completions remain low at 12 percent of the long-term average (since 1985).
Retail availability rates
barely changed, notching down from 13.1 percent in the first quarter to 13.0 percent in the second quarter, according to CBRE. Availability rates have fluctuated between 13.0 percent and 13.2 percent for over two years. Rents continued their four-and-a-half-year slide in the second quarter and are off 1.8 percent from a year earlier. Net absorption was up from the first quarter and positive for the fourth-straight month at 4.1 million square feet; completions were up slightly and stood at 11 percent of the long-term average (since 1980)
Industrial availability rates
stood at 13.2 percent in the second quarter of 2012, continuing their slow but consistent eight-quarter decline; rates are now down 80 basis points from the same quarter a year earlier. Rents edged up for the second-straight quarter but are still barely above the 14-year low reached in the last quarter of 2011. Net absorption was strong at 26.5 million square feet, although down from the previous quarter; completions were down slightly and stood at only 11 percent of the long-term average (since 1980).
Apartment vacancy rates
edged down to 4.8 percent in the second quarter of 2012, continuing a fairly consistent two-and-a-half-year slide. Rents were up 1.1 percent in the second quarter and are 5.0 percent higher than a year earlier. Completions in the first quarter of 2012 were up a whopping 135 percent to 34,784 units. This is the highest quarterly level in three years and it is now at 83 percent of the long-term average (since 1994).
Hotel occupancy rates stood at 65.1 percent in the second quarter of 2012, up from 63.2 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.
(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).