This month’s ULI Barometer is laced with fluctuations in both directions, but even the most positive gains are still very weak when compared to historical trends.
August data from the housing sector remains bleak, although the direction of change has been positive for several indicators. Existing single-family home sales increased, housing starts for all types of housing increased, and new homes sales remained steady.
Commercial property prices fell for the second straight month and CMBS delinquency rates were the highest yet seen in the industry. Still, REIT sector returns were positive again in September after a slight dip in August. Property sales volumes continued to rise, and CMBS issuance saw some activity for the second straight month.
Job losses are now reflecting cuts in local government employment, although the private sector continues to add jobs. Consumer confidence fell while retail sales maintained a steady growth rate.
The ULI Real Estate Business Barometer is a summary of more than 60 key indicators of the performance of the economy, real estate capital markets, housing, and commercial/multifamily investment property. More information can be found throughout the tabs and in the links to the right. To view/print all the October Barometer tabs, click here.
Key economic data are decidedly mixed, with marginally positive news. Private sector job growth continued in September, revised second-quarter GDP growth is slightly higher than first estimated, retail sales maintained the previous month’s growth rate, the seesawing consumer confidence index was down this month, and S&P 500 returns were a bright spot in September as they turned positive once again.
The employment report continues to be affected by the wrap-up of the 2010 U.S. census, but also by job losses in local government. The net loss of 95,000 jobs in September reflects a decline in goverment employment of 159,000 (77,000 temporary Census workers and 76,000 local government employees) and masks the creation of 64,000 private sector jobs. Private sector employment has grown by 593,000 jobs over the last 12 months.
The unemployment rate in September was steady at 9.6 percent.
The final estimate of the second-quarter 2010 GDP growth brought it slightly higher than the second estimate but still substantially lower than initial estimates; second-quarter GDP growth is now 1.7 percent, only 46 percent of first-quarter growth. The current second-quarter 2010 estimate is much lower than the historical average (since 1970) of 2.9 percent.
The Consumer Confidence Index declined to 48.5 in September from 53.2 in August. August’s index had shown a positive increase after two straight months of decline. Retail sales growth was steady at a minimal level, increasing 0.4 percent for the second straight month.
Inflation, as measured by the Consumer Price Index, rose slightly by 0.3 percent in August, driven by increases in gasoline prices and household energy costs.
The S&P 500 index reversed August’s decline, to increase by 8.9 percent in September. Year-over-year returns are up 10.2 percent as of the end of September.
Real Estate Capital Markets
The real estate capital markets had a mixed month as both negative and positive changes continued. Commercial property prices declined and CMBS delinquencies continued their rise. Still, REIT returns were positive again and recent increases in property sales volumes were sustained, although they remain near historically low levels.
The REIT sector saw positive total returns again in September—of 4.5 percent—after a slight dip in August. Total returns for the past year are a healthy 30.3 percent. Total returns for the month by property sector show the highest returns for lodging/resorts and industrial, 11 and 8.8 percent total returns, respectively, and the lowest returns for apartments at 3.4 percent.
CMBS issuance was active again in September for the second straight month, according to Commercial Mortgage Alert, after being nonexistent in July. The $0.63 billion total issuance did not include any multi-borrower deals. CMBS delinquency rates, according to Trepp LLC, rose to 9.05 percent, the highest rate in the history of the CMBS industry. Since April 2009, each successive month has seen a new historic high in delinquency rates.
Property sales volumes increased in August to $8.3 billion from $7.7 billion in July, according to Real Capital Analytics, but were still only just one-half of the monthly average since 2001.
The Moody’s/REAL Commercial Property Price Index declined 3.0 percent in July, the second 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 7.3 percent from a year ago and down 43.2 percent from the October 2007 peak, and are basically flat year-to-date.
Capitalization rates remained fairly steady at 7.53 percent in August, similar to July’s level of 7.51. Cap rates remain above the 6.39 percent of June 2007, and are similar to the historical norm of 7.6 percent (since 2001).
As noted in last month’s Barometer, the NCREIF Property Index turned in the second positive quarter in 2010, with total returns of 3.31 percent; total returns for the past year are –1.5 percent.
For additional commentary on real estate capital markets, see ULI senior fellow Steve Blank’s Capital Markets articles.
Note: The commentary and data outlined below and in the accompanying table are the same as that presented last month because all the information is quarterly data.
Vacancy and rental rates across all property types stabilized in the second quarter, continuing a trend seen in the first quarter of 2010. With this leveling off, rents are now between 7 percent and 19 percent below their pre-recession peak—apartment rents are down 7 percent from their peak, office rents are down 12 percent, retail rents down 13 percent, warehouse rents are down 14 percent, and the hotel rev/par index is down 19 percent. Vacancy rates remain well above historic norms.
Office vacancy rates stood at 19.6 percent in the second quarter of 2010, the same as in the first quarter, and just 110 basis points above the second quarter a year ago, according to Property & Portfolio Research (the source of all data presented in this section). Completions in the second quarter were up as a percentage of inventory, increasing from 0.1 percent in the first quarter to 0.2 percent, although both quarters are substantially below the historical average of 0.7 percent. The absorption of 7.1 million square feet was a significant improvement from the –7.76 million square feet absorbed in the first quarter and the –39.3 million square feet absorbed in the second quarter a year ago. Rents remained stable and are off 4.9 percent from the same quarter a year ago.
Retail vacancy rates stood at 19.2 percent in the second quarter of 2010, down slightly from 19.4 percent in the first quarter and just 170 basis points above the same quarter a year ago. Completions in the second quarter of 2010 as a percent of inventory were 0.1 percent, the same as in the first quarter and below the 0.6 percent historical average. Rents remained stable in the first quarter and are off 5.4 percent from the same quarter a year ago.
Warehouse vacancy rates stood at 13.2 percent in the second quarter of 2010, down slightly from 13.3 percent in the first quarter and 100 basis points above the same quarter a year ago. Completions in the second 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 6.8 percent from the same quarter a year ago.
Apartment vacancy rates stood at 8.1 percent in the second quarter of 2010, down slightly from the first quarter and 10 basis points below the same quarter a year ago. Completions in the second 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 2.5 percent from the same quarter a year ago.
Hotel occupancy rates (a moving 12-month average) stood at 59.8 percent in the second quarter of 2010, as they did in the same quarter a year ago. Completions were down slightly as a percentage of rooms, from 3.1 percent in second-quarter 2009 to 2.6 percent, but remained above the historical average of 2.3 percent. The Index of Revenue per Available Room (RevPar Index) was up 6.4 percent from the same quarter of 2009.
Sales of existing single-family homes increased in August, and new home sales are at their lowest since 1963. Building permits are down for single-family housing and and up for multi-family housing ,and housing starts increased for all types of housing.
Single-family building permits fell for the fifth straight month—a 1 percent decline from 406,000 in July to 401,000 in August, the lowest level since April 2009. Over the past 12 months, monthly single-family permits have bounced between 41 percent and 53 percent of the monthly average (since 1970), with August’s permits at 41 percent.
Multifamily building permits increased in August by 11 percent from 134,000 permits in July to 150,000 in August. Still, over the past 12 months, monthly multifamily permits have bounced between only 25 percent and 38 percent of the monthly average (since 1970), with August’s permits at 38 percent.
Single-family housing starts increased by 4 percent in August to 438,000 after a three-month decline. August’s starts are 40 percent of the monthly average (since 1970) for single-family housing starts.
Multifamily housing starts increased by 43 percent following a 22 percent increase in July. Multifamily housing starts in August stood at 147,000, representing 41 percent of the monthly average (since 1970). August’s starts were the highest since February 2009.
Prices for new homes were down slightly in August at $204,700, compared to July’s prices of $205,900, making August’s prices the lowest since the beginning of the recession.
The S&P/Case-Shiller Index for existing home prices barely changed, but the direction was positive for the fourth straight month after a six-month decline; the July index is now 3.2 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 2 percent in August after a stable July and a 5.2 percent increase in June; prices are now 1.2 percent above where they were in August 2009. Prices of existing condominiums were stable in August, according to NAR, and are 2.8 percent lower than last August. Housing affordability remains near historic highs.
The number of existing single-family home sales (seasonally adjusted) increased 7 percent in August, reversing the decline that started in May, immediately after the expiration of the homebuyer tax credit. Still, August’s sales of 3.62 million existing homes were at a low not seen since 1995, and monthly supply now stands at 11.3 months. Existing condo sales increased 8.5 percent to 510,000 from July’s recession low of 470,000, and monthly supply stepped down from 17.3 months to 13.9 months. New single-family home sales (seasonally adjusted) remained steady at July’s level of 288,000 after a decrease 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 stabililty in sales and a slight decline in inventory, the supply decreased to 8.6 months from 8.7 months.
Foreclosure filings—default notices, scheduled auctions, and bank repossessions—increased 4 percent in August, following a similar increase in July. August’s increase was due primarily to an 8.7 percent increase in scheduled auctions as well as a 2.6 percent increase in bank repossesions; this brought the number of scheduled auctions and repossessions back to the highest levels during the period for which data is available (starting in 2005). Default notices in August remained about the same as in May, June, and July.
Home mortgage rates (30-year fixed) remained very low, and were at 4.35 percent in September.