The top eight trends in this month’s Barometer point to an evolving fragility as economic indicators reacted strongly to early August’s federal political and financial turmoil. Real estate capital markets were mixed, if only because some key positive indicators are reported on a lagging basis, and the weak housing data stay weak. The direction, pace, and comprehensiveness of this month’s sobering data is distressing, but there is some consolation in the fact that, compared with a year ago, 64 percent of the key indicators in the Barometer are better and 36 percent are worse.
Note: More commentary and data can be found throughout the tabs and in the accompanying tables.
In those top eight trends:
- Employment figures were flat. Even adjusting for the 45,000 jobs at Verizon affected by August’s short-lived strike—recorded as lost, but not regained, even though they were—August’s employment numbers remain dismal.
- Second-quarter 2011 GDP growth—already alarmingly weak, according to the first estimate in the previous month’s Barometer—was revised downward and is now barely a third of the long-term quarterly average.
- Consumer confidence dropped sharply in August; the index is now at about half its level in January 2008.
- Total construction value put in place, which had risen for three months, fell and is essentially at the same level as one year ago.
- NAREIT returns were down in August—substantially for the lodging/resort and industrial sectors—with the exception of the apartment sector, which was barely positive.
- CMBS issuance fell by over 50 percent.
- Commercial property prices rose, continuing the recent reversal of almost a half year of decline, and property transactions stayed at about the same monthly level as throughout the previous 12 months. But these are lagging indicators, so any impact of August’s events is not yet known.
- Sales of both new and existing single-family homes fell. Monthly sales of new single-family homes are lower than ever previously recorded—despite the second-lowest monthly mortgage rates ever recorded.
All indicators were weak in August: no growth—or barely any growth—in employment (depending on whether the official figures are adjusted for a short-lived strike); a downward adjustment of already-low employment figures for June and July due to more complete data on losses in the public sector (these losses exceeded the number of Minnesota state workers laid off for three weeks in July); a downward adjustment of the second-quarter GDP; a plunge in consumer confidence; a decline in construction value; and negative S&P returns. The only positive indicator was figures for retails sales, which were released early in the month and reflect consumer behavior in July, before confidence fell.
There was no apparent net change in the number of jobs in August: while the private sector created 17,000 new jobs, 17,000 government jobs were lost. The decline in government jobs was overwhelmingly in education at the local level (but also in other local government functions), education at the state level, and in the U.S. Postal Service. The change in the private sector was primarily due to gains in health care, professional services, membership organizations, and mining, and the loss of 48,000 jobs in telecommunications, 45,000 of which were striking Verizon workers. The strike began and ended in August but, because of the timing, only the reduction in payroll employment during the strike was recorded by the U.S. Department of Labor, not the reinstatement. It is conceivable that, had the strike not occurred, the reported numbers would show that private sector employment actually increased by 62,000 jobs. Still, 1.26 million jobs have been created since August 2010—only 18 percent of the 6.82 million lost since February 2008. The unemployment rate remained unchanged at 9.1 percent.
The revised estimate of second-quarter 2011 GDP growth is 1.0 percent, barely a third of the long-term quarterly average growth of 2.8 percent. This second estimate, based on more complete data, is a downward revision from the initial estimate of 1.3 percent. First-quarter GDP growth was a meager 0.4 percent. Factors contributing to the second-quarter growth were higher exports, nonresidential fixed investment, personal consumption of services, and federal government spending, which were partially offset by declines in state and local government spending and private inventory investment. Imports, which are a subtraction in the GDP, increased, and personal consumption of durable goods declined.
The Consumer Confidence Index fell 25 percent from 59.2 in July to 44.5 in August. It is now at about half the January 2008 level of 87.3. Retail sales rose in July, with relative growth strongest in gasoline, electronics and appliances, and miscellaneous, though sales in most categories increased. The few declines were in sporting goods/hobby/books, department store merchandise, building materials, and food services. Actual retail sales volume—$390.4 billion—is up 8.5 percent over one year ago but exceeds the pre-recession peak of $378.4 billion (in November 2007) by only 3.0 percent.
The value of total private and public construction put in place fell 1.3 percent from $799.8 billion in June to $789.5 billion in July, after three straight months of growth. July’s construction value is about two-thirds of the pre-recession high in March 2006.
Inflation, as measured by the Consumer Price Index, was 0.5 percent in July, above the long-term monthly average (since 1970) of 0.4 percent. About half July’s increase was attributable to a sharp increase in gasoline prices; the costs of apparel, used vehicles, electricity, and food at home also rose. For the past 12 months, the CPI has risen 3.6 percent.
June’s S&P 500 returns were negative for the fourth-straight month, at –5.4 percent, after eight straight months of positive returns, and year-over-year returns stood at 18.5 percent, still above the long-term 12-month average of 10.6 percent.
Real Estate Capital Markets
Commercial property prices in the Moody’s and CoStar indexes continued their recent upward trend while transaction volumes approximated the levels seen in 12 of the previous 13 months (the high transaction levels in May were an anomaly caused by one major acquisition). NAREIT returns were negative in July for all sectors except for apartments. And the CMBS market slowed substantially.
Capitalization rates, as reported by Real Capital Analytics, were stable in July at 7.09 percent, the lowest level since December 2008. Cap rates remain above the 6.40 percent of September 2007. As reported in last month’s Barometer, NCREIF’s capitalization rates were also fairly stable at 6.06 percent in the second quarter. NCREIF’s cap rates remain above the 5.4 percent level of the first quarter of 2008 but are below the historical norm of 7.6 percent (since 1978).
Commercial property sales volumes
fell to $10.3 billion in July from $23.6 billion in June, according to Real Capital Analytics; June’s high transaction level was almost entirely due to Blackstone’s purchase of the retail assets of Centro Properties Group. The better comparison is to the previous 12 months, when transaction levels were less volatile and averaged $11.7 billion per month. July’s total numbers are 66 percent of the historical monthly average (since 2001); activity was concentrated in apartment and office sectors.
According to Real Capital Analytics, the ten most active sales markets in the past 12 months are, in descending order: Manhattan, Los Angeles, Chicago, Dallas, Washington, D.C, San Francisco, the Virginia suburbs of Washington, D.C., Boston, Houston, and Atlanta. Over $4.97 billion in transactions have been recorded in each of these cities since August 1, 2010.
The Moody’s/REAL Commercial Property Price Index edged up 0.9 percent in June after a 6.3 percent jump in May, continuing its reversal of five straight months of decline that in April had led to the lowest value since the index’s inception in 2001. (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 off 45 percent from their peak in October 2007; the index is down 6.6 percent from a year ago.
The Investment Grade Index of the CoStar Commercial Repeat-Sale Indices increased 3.1 percent in June, the third-straight month of growth. (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 33.3 percent from the peak value in June 2007 and up 6.8 percent from a year ago. The General Grade Index of the CoStar Commercial Repeat-Sale Indices increased 1.9 percent, also the third-straight month of growth; it is now down 33.2 percent from its peak value in August 2007 and down 3.3 percent from last year.
As reported in last month’s Barometer, the NCREIF Property Index turned in a positive second quarter, with total returns of 3.9 percent, continuing the positive returns started in first-quarter 2010. The capital appreciation component was 2.4 percent for the quarter. Total 12-month returns are now 16.7 percent. Total returns for the quarter by property sector range from 2.5 percent for the retail sector to 4.2 percent for apartments and 4.5 percent for both the office and industrial sectors.
The REIT sector saw negative total returns in August of 5.6 percent, although total one-year returns remained healthy at 18.4 percent. Total returns for the month by property sector range from –23.5 percent for the lodging/resorts sector to 0.2 percent for the apartment sector, the only sector with positive returns.
fell sharply from $3.73 billion in July to $1.65 billion in August, according to Commercial Mortgage Alert. CMBS delinquency rates, according to Trepp LLC, decreased to 9.52 percent in July, following a jump in June that Trepp attributes, in large part to a particular classification system used by Special Servicers. In turn, subsequent reclassifications contributed to August’s decline.
Permits and starts of all types of housing remain substantially below their long-term monthly averages and declined further or were essentially flat in July. The only exception was multifamily starts which, although at historically low levels, moved upward for the third-straight month. Sales of both new and existing single-family homes fell, and sales of existing condominiums remained steady; sales of new single-family homes are at a low not previously recorded, while sales of both types of existing homes remain at or above their long-term average. The forward-looking National Association of Realtors (NAR) Index of Pending Sales (of existing single-family homes, condos, and co-ops) was off slightly. Prices of existing homes showed several months of positive change through June, according to all indicators, but the one indicator for July showed some slippage.
The S&P/Case-Shiller Index for existing home prices rose 1.1 percent in June, the third-straight month of growth after eight months of decline, and is now down 32 percent from its peak in July 2006. (This index, a composite of repeat transactions in 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) also rose in June for the third-straight month, by 1.4 percent, after ten straight months of decline; it is down 18 percent from its peak in June 2007. (The HPI covers repeat transactions in the entire country and is reported monthly with a two-month lag.) NAR data (which report individual, unpaired transactions) for June showed a strong 3.7 percent rise in the median price of existing single-family homes, the fourth-straight month of increases, but in July prices slipped by 0.7 percent; median prices for existing single-family homes stood at $174,600, down 21 percent from the peak in 2006. Median prices for new single-family homes dropped 6.3 percent in July to $222,000, exactly reversing May’s strong gain; new home prices are now down 10 percent from the peak in 2007.
Single-family building permits
continued to be almost flat for the second-straight month, rising barely 0.5 percent from 402,000 in June to 404,000 in July. July’s permit numbers remain at 42 percent of the historical monthly average (since 1970) and 23 percent of the pre-recession high in September 2005. Single-family starts decreased 5 percent from 447,000 in June to 425,000 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 slipped almost 1 percent in July, following small declines in both May and June. With almost an equal drop in inventory, supply remained steady at 6.6 months. Monthly sales of new single-family homes in each of the past 15 months have been the lowest since record keeping began in 1963.
The number of existing single-family home sales (seasonally adjusted) fell almost 4 percent to 4.12 million in July but remain above the long-term monthly average (since 1970); supply increased from 8.9 to 9.4 months. July’s monthly sales were 65 percent of the pre-recession high in September 2005. The forward-looking NAR Index of Pending Sales (of existing single-family homes, condos, and co-ops) slid 1.3 percent in July, following two straight months of increases.
Multifamily building permits fell by 12 percent to 171,000 in July and are now at 44 percent of the monthly average (since 1970). Multifamily housing starts increased by 6 percent in July to 170,000, after a dramatic 22 percent rise in June. Still, this represents only 48 percent of the monthly average (since 1970). Existing condo sales were flat at 530,000, just below the long-term monthly average (since 1970); with an increase in inventory, supply rose from 10.7 to 13.1 months.
Housing affordability remains near historical highs.
Foreclosure filings—default notices, scheduled auctions, and bank repossessions—decreased by 4 percent in July from a month earlier to 212,764, according to RealtyTrac, and filings are 35 percent lower than one year ago. July’s filings are the lowest monthly totals since November 2007. RealtyTrac notes, “Unfortunately, the falloff in foreclosures is not based on a robust recovery in the housing market but on short-term interventions and delays that will extend the current housing market woes into 2012 and beyond.”
Home mortgage rates (30-year fixed) fell in August to 4.27 percent, the second-lowest monthly rate since record-keeping began in 1971. The lowest monthly rate, 4.23 percent, was recorded in October 2010.
(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; The source of some of the data presented in this section of the Barometer has changed: data for office, retail, industrial, and apartment property are now provided by the CoStar Group. Smith Travel Research continues to be the source for hospitality properties.)
In the second quarter of 2011, there was little change in rental rates in the office, retail, and industrial sectors; rates are off 11, 12, and 14 percent, respectively, from their pre-recession peak. Vacancy rates for these sectors changed little as well, but did edge downward. Apartment rents and hotel RevPAR increased and are now down only 3 percent and 8 percent, respectively, from their pre-recession highs. (Hotel RevPAR is compared to past second quarters only because of the industry’s seasonal nature.) Apartment vacancy rates improved slightly and hotel occupancy rates experienced the largest positive movement of all property sectors. Completions of both apartments and hotel rooms are substantially below their historical averages.
Office vacancy rates stood at 13.00 percent in the second quarter, little changed from 13.06 percent in the first quarter of 2011 and 13.15 percent in the same quarter one year ago, according to the CoStar Group. Rents remained stable and are off just 0.8 percent from the same quarter a year ago. The net absorption of 4.5 million square feet of space is almost triple that of the previous quarter; quarterly absorption has been uneven but consistently positive since the second quarter of 2010.
Retail vacancy rates stood at 7.22 percent in the second quarter, little changed from 7.27 percent in the first quarter of 2011 and 7.51 percent in the same quarter one year ago, according to the CoStar Group. Rents remained about the same in the second quarter and are off 3.5 percent from the same quarter a year ago.
Industrial vacancy rates stood at 9.87 percent in the second quarter, down from 10.02 percent in the first quarter of 2011 and 54 basis points below the figure for the same quarter a year ago. Rents stayed the same and are off 2.4 percent from the same quarter a year ago. Net absorption remained strong at 27 million square feet, increasing almost 2 percent over the previous quarter; quarterly absorption has been consistently positive since the second quarter of 2010.
Apartment vacancy rates stood at 6.9 percent in the second quarter, down from 7.2 percent in the second quarter and 80 basis points below the figure for the same quarter a year ago. Rents were up 1.5 percent in the second quarter and are 3.9 percent above rents of the same quarter a year ago. Completions in the second quarter of 2011 stood at 5,775 units, down from the previous quarter and the same quarter a year ago; completions were 21 percent of the quarterly average (since 2001).
Hotel occupancy rates stood at 63.4 percent in the second quarter of 2011, up from 60.7 percent in the same quarter a year ago, according to Smith Travel Research. Completions were down substantially as a percentage of rooms—from 2.1 percent in second-quarter 2010 to 0.7 percent—and are now below the historical average of 2.09 percent. The RevPAR Index was up 8.1 percent from the same quarter of 2010.