Note: Please click here to see April’s ULI Real Estate Business Barometer.
Industrial and retail property sectors gathered steam as absorption vaulted; retail rents reversed their 4.5-year slide. Commercial property transactions settled down following an impressive end-of-year spike, but buyer appetite otherwise showed strength: prices are at, and CMBS issuance is near, post-recession highs. Apartment rents reached an all-time high. Distress sales continue to drag down existing home prices, but foreclosures are now at 6-year lows.
The top ten trends in this month’s Barometer are:
- Employment growth in February was almost double that witnessed in January; the unemployment rate inched down to its lowest level since the end of 2008. Consumer confidence jumped sharply; the manufacturing sector expanded for the third-straight month. S&P 500 returns were above the historical monthly average.
- Fourth-quarter GDP growth was revised from barely negative to barely positive but still reflects minimal change. Cutbacks in federal defense spending played a significant role; at the same time, personal consumption expenditures were strong.
- Commercial property prices were at 4-year highs, though still well below their prerecession peak, according to two repeat-sales indices. According to an index of REIT portfolio values, prices are at 5.5-year highs and are only slightly off their peak. Cap rates remain low and stable.
- Commercial property transaction volume settled down to almost a 12-month low in January after having vaulted to a stunning end-of-the-year high.
- CMBS issuance was down in February from the previous month’s 5-year high, but it is still one of the highest monthly volumes during those 5 years; spreads widened a bit.
- Total REIT returns were just above their long-term average, with positive returns for the office and retail sectors and negative returns for the lodging/resorts, apartments, and industrial sectors.
- The industrial sector gathered steam as absorption jumped to a 6-year high; rents remain close to a 14-year low. Retail absorption doubled to a 5-year high; rents reversed their 4.5-year slide, albeit just barely. Office absorption remains moderate and steady an rents continue to inch up.
- Apartment sector completions soared past the long-term quarterly average; rents ticked up to a new all-time high. Hotel RevPAR showed healthy improvement from a year earlier.
- New single-family permits, starts, and sales increased just slightly in January but are at substantially higher levels than one year ago (between 20 and 29 percent). Prices fell sharply and are just slightly above those seen one year ago.
- Multifamily permits moved up a bit and starts dipped, but January’s levels are a whopping 38 percent and 49 percent, respectively, above those of January 2012.
Overall, 63 percent of the key indicators in the Barometer have improved from the previous month’s Barometer; compared with a year ago, 82 percent have improved.
(For annual projections of key Barometer indicators, see the ULI Real Estate Consensus Forecast).
Monthly employment growth in February was almost double that of the previous month and the unemployment rate inched down to its lowest level since the end of 2008. Consumer confidence jumped sharply; the manufacturing sector expanded for the third-straight month. S&P 500 returns were above the historical monthly average.
Only the indicators released for January were sluggish: Retail sales were slow and private construction fell, primarily due to a drop in nonresidential construction. Fourth-quarter GDP growth was revised from negative to positive but still reflects minimal change.
Net job growth in February of 236,000 jobs was made up of 246,000 new private sector jobs and the loss of 10,000 public sector jobs. February is the third month in the last 12 months in which total job gains exceeded 200,000, and the fifth month in which private sector job growth exceeded this level. The country has 3 million fewer jobs than it did 5 years ago; at February’s growth rate, it would take another 13 months to regain just those jobs. The greatest private sector job gains in February were in professional and business services, construction, and health care; the information industry (due primarily to a large gain in the movie and recording industry) and retail trade also showed solid growth. The overall unemployment rate in February was 7.7 percent, down from 7.9 percent in January, and the lowest in more than 4 years.
Fourth-quarter GDP growth was 0.1 percent, revised from –0.1 in the second estimate, remaining a sharp slowdown from the third-quarter growth of 3.1 percent. The increase in the fourth quarter primarily reflects positive contributions from personal consumption expenditures, nonresidential fixed investment (primarily computers and software), and residential fixed investment, offset by negative contributions from private inventory investment, federal government spending (all national defense), exports, and state and local governments. Imports, which are a subtraction in the calculation of GDP, decreased.
The Consumer Confidence Index made a sharp comeback after declining for three straight months, rising from 58.4 in January to 69.6 in February. Total retail sales in January were slow with only a 0.1 percent increase, driven by solid increases in general merchandise and grocery stores but offset by declines in health and personal care stores, clothing stores, and motor vehicles. Total retail sales of $416.6 billion are 4.4 percent higher than those of a year earlier.
The value of private construction fell 2 percent in January from December’s 3-year high, though it was up 12 percent from a year ago. January’s decrease was due entirely to a 5 percent dip in nonresidential construction as residential construction remained unchanged. Public construction put in place slipped 1 percent and is down 3 percent from a year earlier. January’s total construction value of $883.3 billion is down 27 percent from the prerecession high in March 2006, with private construction down 36 percent.
Inflation, as measured by the Consumer Price Index, was unchanged in January. This was due to a decline in the gasoline price index but with offsetting increases in most other categories. Over the past 12 months, inflation was 1.6 percent.
Monthly returns for the S&P 500 were 1.4 percent in February, above the historical monthly average (since 1970). Year-over-year returns were at 13.5 percent.
The Purchasing Managers’ Index registered 54.2 in February, an increase from 53.1 in January, indicating expansion in the manufacturing sector for the third-straight month. This month’s index is the highest since June 2011.
Real Estate Capital Markets
Transaction volumes settled down to almost a 12-month low in January after having vaulted to a stunning end-of-the-year high. Commercial property prices were at 4-year highs, although still well below their prerecession peak, according to two repeat-sales indices. According to an index of REIT portfolio values, prices are at 5.5-year highs and are only slightly off their peak. Cap rates remain low and stable. Total REIT returns were just above their long-term average, with the office sector the strongest. CMBS issuance was down in February from the previous month’s 5-year high, but it is still one of the highest monthly volumes during those 5 years; spreads widened a bit.
Commercial property sales volumes (excluding land and hotels) fell 74 percent to $12.8 billion in January from December’s end-of-the-year spike of $49.6 percent, according to Real Capital Analytics (RCA); December’s volume ranked as the second- highest monthly volume since 1991. Transactions were down in all sectors and in a year-to-year comparison, total transactions were down 7 percent.
According to RCA, the ten most active sales markets in the past 12 months are, in descending order: Manhattan, Los Angeles, Chicago, Seattle, San Francisco, Dallas, Houston, Boston, Atlanta, and Boston. More than $7.25 billion in transactions have been recorded in each of these cities since February 1, 2012.
Moody’s/RCA Commercial Property Price Index was up 2.8 percent in December to a 4-year high. (This is a same-property index based on all U.S. transactions exceeding $2.5 million.) Values are 8.1 percent higher than a year ago, but still down 20 percent from the December 2007 peak.
The value-weighted composite CoStar Commercial Repeat-Sale Index in December was essentially unchanged from November, remaining at the highest level in 4 years. (The index is based on a repeat-sales methodology that tracks transactions exceeding $100,000 and includes land sales.) Values are 4 percent higher than a year ago, but are still down about 16 percent from the peak value in September 2007.
The GSA Commercial Property Price Index, based on estimates of private market values for REIT portfolios, increased 1 percent in February to its highest level in 5.5 years. Values are now just off the peak by 1.3 percent and are 7.3 percent higher than a year ago.
As reported in last month’s Barometer, the NCREIF Property Index turned in a positive fourth quarter with total returns of 2.5 percent, sustaining the consistently positive returns of the last 3 years, but at somewhat lower rates in 2012 than in 2010 and 2011. The capital appreciation component was 1.1 percent for the quarter. Total 12-month returns are now 10.5 percent. Returns for the quarter by property sector were all between 2.2 and 2.8 percent, with the exception of 3 percent returns in the retail sector.
Capitalization rates, as reported by Real Capital Analytics (RCA), were essentially stable at 6.87 percent in January—down only 1 basis point from December. NCREIF cap rates remained compressed in the fourth quarter, essentially stable at 5.87 percent, also down just 1 basis point.
Total equity REIT returns were fair in February at 1.3 percent. Positive returns included 2.9 percent for the office sector and 1.5 percent for the retail sector. Returns for the lodging/resorts, apartment, and industrial sector were negative at –0.3 percent, –0.7 percent, and –1 percent, respectively. One-year total returns as of February stood at 17.7 percent, with one-year returns reaching 22.7 percent for the retail sector and 22.5 percent for the industrial sector. Lodging/resorts at 11.6 percent and apartments at 5.6 percent had the lowest one-year returns.
CMBS issuance during February was $7.34 billion, according to Commercial Mortgage Alert, down 14 percent from the January’s 5-year monthly high. Still, it is the third-highest monthly volume during that time (the second highest was in November) and above the long-term monthly average (since 1991). The spread over swaps for 10-year AAA new CMBS issuance was 81 basis points in the last week of February, a notch up from 77 basis points at the end of the last week of the previous month. The spread is well below the 122-basis-point spread of a year ago, signaling strong appetite for CMBS securities. According to Trepp LLC, CMBS delinquency rates continue to retreat from last summer’s historical high and are now at 9.42.
Bank real estate loan delinquency rates continued to fall in the fourth quarter. Commercial and multifamily mortgage delinquency rates are now 2.85 percent and 1.56 percent, respectively. The multifamily delinquency rate is now below the long-term historical average (since 1991). Construction and development loans have the highest delinquency rate at 8.34 percent, substantially above the quarterly historical average (since 1991) of 5.3 percent.
Permits, starts, and sales of new single-family homes all increased just slightly in January, but all are significantly higher than one year ago; prices of new homes fell sharply in January, after just surpassing their prerecession highs in December. Sales of existing single-family homes barely increased in January and are somewhat higher than one year ago; prices of existing homes remain substantially below their prerecession highs, affected at least in part by the relatively large number of distress sales. In 2012, for example, 43 percent of all sales were distress sales. Still, all data sources show some increase in existing home prices from one year ago. Multifamily permits and starts vaulted 38 percent and 49 percent, respectively, over January 2012 levels. Total new foreclosure proceedings were down to a six-year low.
Existing single-family home prices increased—albeit just barely—according to the S&P/Case-Shiller Index (which tracks repeat sales in 20 cities), with a 0.16 percent shift in December. Prices are now 6.8 percent above those of one year ago, though still significantly lower—29 percent—than 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) slipped 0.22 percent in December, but prices remain up 5.9 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), declined 3.4 percent to $174,100 in January. Still, prices are almost 13 percent higher than one year ago, though 22 percent below the peak in 2006.
New single-family home prices fell 9 percent in January to $226,400 after almost reaching the prerecession peak. Although January’s level remains 2 percent above that witnessed in January 2012, it is now 9 percent below the 2007 peak.
Single-family building permits were up 1.4 percent in January (an annual rate based on a three-month moving average) to 575,000. The number of permits has increased each of the past 21 months and is at its highest level in 4.5 years (since July 2008). Still, January’s permit numbers are almost 70 percent below the prerecession high witnessed in November 2005 and 40 percent below the long-term monthly average (since 1970).
Single-family housing starts increased 1.4 percent in January (on a three-month moving average) to 597,000 and are now at their highest level in almost 4.5 years (since August 2008); however, starts are 66 percent below the prerecession high seen in November 2005.
Sales of new single-family homes (seasonally adjusted) vaulted 16 percent to 437,000 in January, the highest monthly level in 4.5 years (since July 2008). Sales are up 29 percent over January 2012. Still, monthly sales volumes are 68 percent below the prerecession high in July 2005. Inventory remained unchanged, just above the record low (since record keeping began in 1963) reached last July.
Sales of existing single-family homes (seasonally adjusted) increased by 2 percent in January to 4.34 million. January’s monthly sales were 32 percent below the prerecession high witnessed in September 2005. Inventory declined by about 3 percent to 1.55 million, a low not seen since 2000. The forward-looking NAR Index of Pending Sales (of existing single-family homes, condominiums, and co-ops) jumped 4.5 percent to an almost three-year high.
Multifamily building permits increased 4 percent to 308,000 in January (based on a three-month moving average), the highest monthly level since August 2008. Multifamily housing starts were down 2 percent, after five straight months of progressively stronger growth. Still, starts in January were at the highest monthly level since September 2008.
The rent index for apartments, calculated quarterly by CBRE, was up 0.8 percent in the fourth quarter of 2012 to $1,312, which is 4.2 percent higher than a year earlier. Apartment vacancy rates, reported quarterly by CBRE, increased to 5 percent in the fourth quarter, reversing an almost three-year slide.
Existing condo sales reached 580,000 in January, up 2 percent from December. This is up 14 percent over January 2012 and 18 percent above the long-term monthly average (since 1989). Inventory fell 13 percent in January to an 11.5-year low; supply fell to 4.0 months.
New foreclosure filings—default notices, scheduled auctions, and bank repossessions—decreased 7 percent in January to a total of 150,864, the lowest since April 2007, according to RealtyTrac. Separately, RealtyTrac reported that foreclosure-related sales accounted for 21 percent of all residential sales in 2012, down from 23 percent of all sales in 2011 and 28 percent in 2010. Another 22 percent of all residential sales sold as short sales in 2012; in total, 43 percent of all sales in 2012 were distressed sales.
Home mortgage rates (30-year fixed) moved up in February to 3.53 percent from 3.41 percent in January, continuing to creep up from December’s rate of 3.35, the lowest monthly rate since record keeping began in 1971.
The industrial sector gathered steam as completions and absorption jumped to 4-year and 6-year highs, respectively; rents, however, remain close to a 14-year low. Office completions remain low and absorption is steady at a moderate level; rents continue to inch up. Retail completions, while slightly up, remain low, but absorption doubled to a 5-year high; rents reversed their 4.5-year slide, albeit just barely. Fourth-quarter completions in the apartment sector soared past the long-term quarterly average; rents ticked up to a new all-time high. Hotel RevPAR showed healthy improvement from a year earlier.
Office vacancy rates are down to 15.4 percent in the fourth quarter of 2012 from 15.6 percent in the third quarter, according to CBRE, continuing the slow decline of the last two years. Rents were up 1.4 percent in the fourth quarter, the eighth-straight quarter of rent growth, and are up 3.8 percent from a year earlier. Net absorption was 8.4 million square feet, almost 75 percent of the long-term average (since 1988), while completions remain low at 21 percent of the long-term average (since 1980).
Retail availability rates edged down to 12.8 percent in the fourth quarter from 12.9 percent in the third quarter, according to CBRE; this is the third-straight month of decline (albeit at a slow pace) and the second month in three years below 13 percent. Rents reversed their 4.5-year slide in the fourth quarter and are now just 0.2 percent off from a year earlier. Though just 70 percent of the long-term average (since 1989), net absorption was the highest quarterly absorption in 5 years at 6.2 million square feet; completions stood at less than 20 percent of the long-term average (since 1980).
Industrial availability rates picked up the pace of improvement and dropped to 12.8 percent in the fourth quarter from 13.1 percent in the third quarter. Availability rates, improving slowly over the last nine quarters, are now down 70 basis points from the same quarter a year earlier. Rents slipped after three straight quarters of growth and are only 1.2 percent above the 14-year low reached in the last quarter of 2011. Net absorption was strong at 55.9 million square feet, the highest quarterly absorption rate in more than six years and almost double the long-term average (since 1980); completions stood at about 40 percent of the long-term average (since 1980).
Apartment vacancy rates increased to 5 percent in the fourth quarter of 2012, reversing an almost three-year slide. Rents continued their almost three-year growth streak, but, at an increase of 0.8 percent, this is the fourth quarter of a consistently slowing rate of growth. Rents are now 4.2 percent higher than a year earlier. Absorption was negative, reflecting a combination of an expected seasonal dip in leasing activity and a high level of completions. Completions jumped 15 percent in the fourth quarter to 40,534 units, to a three-year high. Completions are at 97 percent of the long-term average (since 1994).
Hotel occupancy rates stood at 56.6 percent in the fourth quarter of 2012, up from 55.3 percent in the same quarter a year earlier, according to Smith Travel Research, while the RevPAR index was up 6.5 percent from a year earlier.