ULI Center for Capital Markets and Real EstateBuyer appetite for commercial property remains strong as indicated by continued low cap rates, rising transactions, and prices at three-and-a-half-year highs. Multifamily construction took a break from its recent momentum; single-family construction continued upward even as new home sales dropped dramatically. Existing housing prices are taking off, but weak economic indicators continue to raise fears that any emerging strength can be easily knocked off course.

Note: More commentary and data can be found throughout the tabs and in the accompanying tables.

Still, 70 percent of the key indicators in the Barometer are better than a year ago.

The top ten trends in this month’s Barometer:

  • GDP growth has now progressively slowed for three straight quarters, according to the advanced estimate for the second quarter of 2012, and is almost down to half of its 40-year quarterly average.
  • Employment growth in July improved relative to the previous three months, but it remains significantly below the growth seen at the beginning of the year and the unemployment rate edged up. Retail sales declined and the manufacturing sector showed signs of contracting for a second-straight month.
  • Private construction was a somewhat bright spot in the economy as it continued to inch up to the highest level in almost three years. Still, total construction is off by about one-third from its pre-recession high.
  • Monthly cap rates were at their lowest level since mid-2008 (a sign of strength in the commercial real estate market), and only 26 basis points above their lowest level recorded (since 2001), reached in mid-2007. Quarterly cap rates slipped to 59 basis points above their lowest (since 1978), reached in the first quarter of 2008.
  • Commercial property transaction volumes rose in June for the second-straight month, breaking the pattern of monthly ups and downs of the past year and a half. Price increases were strong, reaching their highest levels since January 2009.
  • NCREIF property returns were up in all sectors in the second quarter. Total REIT returns in July were positive but were mixed by sector.
  • CMBS issuance was up at a consistent level for the third-straight month, a break from the zigzagging of the past three years. However, delinquency rates rose to a new high.
  • Multifamily housing construction, recently at a three-year high, took a break from its recent momentum with a decline in permit numbers and no change in starts.
  • Single-family housing permits and starts reached two-year highs, though new home sales fell substantially to near 50-year lows and new home prices slipped.
  • Existing home prices rose at national growth rates not seen (or sustained) for years, but sales are down. The most recently available city-level data show price growth in all 20 cities covered, but particularly strong in Chicago, Atlanta, San Francisco, and Minneapolis.

(For annual projections of key Barometer indicators, see the ULI Real Estate Consensus Forecast).



The economy continues to muddle along, growing, but so slowly that it remains vulnerable to major events, whether fiscal, global, or drought related. GDP growth was discouragingly weak in the second quarter, retail sales slipped, and the manufacturing sector showed signs of contraction. Employment growth improved in July but was significantly below the growth seen last winter, private construction inched up, and S&P returns were low but positive.

Net job growth
 in July of 163,000 jobs was made up of 172,000 private sector jobs gained and 9,000 public sector jobs lost. The country has 4.8 million fewer jobs than it did four and a half years ago. At July’s growth rate, it would take almost two and a half years to regain just those 4.8 million jobs.. Private sector job gains in July were greatest in leisure/hospitality, employment services, transportation equipment manufacturing, health care and social assistance, and professional and technical services. The overall unemployment rate in July notched up to 8.3 percent from 8.2 percent in June as the number of unemployed counted in the labor force increased slightly.

Estimated GDP growth for the second quarter of 2012 fell to 1.5 percent in the most recent estimate, down from 2.0 in the first quarter and substantially below the fourth-quarter 2011 rate of 4.1 percent. (Final estimates of previous quarters have recently been adjusted based on regular annual revisions released every July.) The deceleration in GDP growth in the second quarter primarily reflected a slower growth rate in personal consumption expenditures, residential fixed investment and nonresidential fixed investment in structures, and acceleration in imports, which are a subtraction in the calculation of the GDP. These were partly offset by acceleration in nonresidential fixed investment in equipment and software, an upturn in private inventory investment, a smaller decrease in federal government spending, and acceleration in exports.

The Consumer Confidence Index jumped 3.2 points in July to 65.9 after four straight months of decline and now sits just above the figure for May. It remains at 75 percent of the pre-recession level (in January 2008) of 87.3, and because consumers’ attitudes toward current conditions remained unchanged even while their short-term expectations rose, the Conference Board does not expect significant upward momentum in the index in the coming months. Total retail sales in June were down 0.5 percent, and were down 0.3 percent even when gasoline sales are excluded. Retail sales including gasoline have declined for three straight months; excluding gasoline, they have declined two of the three past months. Sales in all major categories declined in June, with the exception of grocery and clothing stores. Retail sales of $401.5 billion are 3.8 percent higher than those of a year ago but exceed the pre-recession peak of $378.4 billion (in November 2007) by only 6.1 percent.

The value of private construction put in place continued to edge up in June, putting it 13 percent higher than a year ago and at its highest level since September 2009. Public construction put in place remained unchanged in July. July’s total construction value of $842.1 billion is down 31 percent from the pre-recession high in March 2006.

Inflation, as measured by the Consumer Price Index, was unchanged in June due to increases in all non-energy items being offset by significant declines in energy commodities. For the past 12 months, the CPI has risen 1.7 percent.

Monthly S&P 500 returns were positive in July—up 1.4 percent—not as strong as June’s jump of 4.1 percent but still above the long-term monthly average of 0.9 percent. Year-over-year returns were strong at 9.1 percent.

The Purchasing Managers’ Index barely increased in July, moving from 49.7 in June to 49.8—levels that indicate contraction in the manufacturing sector, according to the Institute for Supply Management. The manufacturing sector has not contracted since July 2009.

Real Estate Capital Markets


Real estate capital markets were strong: commercial property transaction volumes rose and property prices increased; REIT monthly and NCREIF quarterly total returns were positive; and CMBS issuance was up for the third-straight month, although delinquency rates rose to a new high.

Capitalization rate trends showed continued strength in buyer appetite for commercial properties. Capitalization rates, as reported by Real Capital Analytics (RCA), remained unchanged at 6.80 percent in June, their lowest level since mid-2008 and only 26 basis points above their lowest level recorded (since 2001), reached in mid-2007. As reported by NCREIF, capitalization rates slipped from 5.97 percent in the first quarter of 2012 to 5.96 percent in the second quarter, 59 basis points above their  lowest (since 1978), reached in the first quarter of 2008.

Commercial property sales volumes
(excluding land and hotels) increased 12 percent to $19.5 billion in June, according to RCA, putting the volume above the long-term average (since 2001) for two straight months. The apartment and office sectors were the most active with 28 percent of the volume each, followed by retail (26 percent), and industrial (17 percent). Though the comparison to June 2011 shows a dramatic drop of 41 percent, it should be noted that volume spiked that month due almost entirely to Blackstone’s purchase of Centro Properties Group’s retail assets.

The ten most active sales markets in the past 12 months accounted for 43 percent of all transactions, slightly up from last month. They were, in descending order, Manhattan, Los Angeles, Chicago, Dallas, Boston, San Francisco, Houston, the Virginia suburbs of Washington, D.C., Seattle, and Atlanta, according to RCA. Over $6 billion in transactions have been recorded in each of these cities since July 1, 2011.

The Moody’s/RCA Commercial Property Price Index increased 1.4 percent in May from April; it is up 10.8 percent from a year ago and at its highest level since January 2009. (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 down 21 percent from the peak value in December 2007.

The new value-weighted composite CoStar Commercial Repeat-Sale Index jumped 5.3 percent in May; it is up 13.8 percent from a year ago and is also at its highest since January 2009. (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 down 17 percent from the peak value in January 2008.

The NCREIF Property Index turned in a positive second quarter with total returns of 2.7 percent, sustaining the consistently positive returns of the past two and a half years. The capital appreciation component was 1.2 percent for the quarter. Total 12-month returns are now 12.0 percent. Returns for the quarter by property sector range from 2.1 percent for the lodging/resorts sector to 3.0 percent for retail.

Total equity REIT returns were positive at 2.2 percent in July. Returns for individual core sectors ranged from the apartments and retail sectors at 3.5 percent and 2.0 percent, respectively, to office at 0.1 percent, industrial at –2.0 percent, and lodging/resorts at –5.9 percent. (In noncore sectors, returns above 4 percent were seen in the health care, self-storage, and manufactured housing sectors). One-year total returns as of July stood at 13.7 percent.

CMBS issuance
inched up to $4.25 billion in July from $4.23 billion in June, according to Commercial Mortgage Alert, and now have exceeded $4.2 billion for three straight months—something that has not occurred since late 2007. According to Trepp LLC, CMBS delinquency rates increased to a record high of 10.34 percent in July from 10.16 percent in June as more five-year loans that were securitized in 2007 reached their maturity dates without refinancing.

As reported in last month’s Barometer, bank real estate loan delinquency rates continued to fall in the first quarter, as reported in last month’s Barometer. Commercial and multifamily mortgage delinquency rates are now 3.67 percent and 2.36 percent, respectively. Construction and development loans have the highest delinquency rate at 12.52 percent, substantially above the quarterly historical average (since 1991) of 5.2 percent.



Multifamily permits were down but still near highs not seen since fall 2008, while starts were unchanged. Single-family permits and starts rose to two-year highs, but sales of new homes fell dramatically and prices slipped. Price recovery is strong for existing homes, with the strongest growth rates in eight years, 21 years, or 40 years, depending on the source. Though improving, prices remain substantially below their pre-recession peak. And even though monthly mortgage rates have slid to a series of successively historic lows, home sales dropped substantially and the forward-looking National Association of Realtors (NAR) Index of Pending Home Sales slipped.

After six straight months of slowing decline and then a month with no change, the S&P/Case-Shiller Index for existing home prices rose for the second-straight month with a healthy 2.2 percent increase in May, and prices are now down just 0.7 percent from one year ago. May’s price change represented the highest monthly growth rate since mid-2004. Still, prices remain 33 percent below their 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 House Price Index (HPI), which experienced a similar but more moderate multiyear slide, rose for the fourth-straight month, climbing 1.8 percent in May; it is now up 3.8 percent from a year ago. The monthly increases of the past three months are the largest monthly increases in 21 years, though the Index remains down 16 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 (monitoring individual, unpaired transactions for the entire country) for existing home prices showed a substantial increase of 5.5 percent in June, making it the fourth-straight month of strong growth. The increase in May was 3.5 percent. In fact, the past four months (March through June) together have accounted for the longest sustained period of strong price growth in over 40 years—totaling a whopping 22 percent. Median prices for existing single-family homes stood at $190,100 in June, up 8 percent from one year ago, though still 14 percent below the peak in 2006.

Median prices for new single-family homes declined by almost 2 percent to $232,600 in June. Prices have seesawed over the past year and are now down 3.2 percent from June 2011, though down just 6.2 percent from the peak in 2007.

Single-family building permits were up 1.8 percent in June (an annual rate based on a three-month moving average) to 486,000, the highest monthly permit volume in 25 months. Still, June’s permit numbers are 72 percent below the pre-recession high in November 2005. Single-family housing starts increased by 4 percent in June (on a three-month moving average) to an annualized rate of 519,000—the highest level in 26 months; they are now 71 percent below the pre-recession high in November 2005.

Sales of new single-family homes
fell 8.4 percent in June, more than reversing the previous two months’ increase, though they still are 15 percent higher than a year earlier; monthly sales volume for the past 24 months remains among the lowest seen since record keeping began in 1963. Sales are 75 percent below the pre-recession high in July 2005. Inventory in June increased by less than 1 percent from May (which had registered the lowest monthly figure since record keeping began) and was 13 percent below that of a year earlier.

Sales of existing single-family homes (seasonally adjusted) fell 5.1 percent in June to 3.9 million but remained 4.8 percent higher than those of a year earlier. June’s monthly sales were 38 percent below the pre-recession high in September 2005. Inventory also fell in June, but just by 2.8 percent, so supply crept up to 6.5 months. The forward-looking NAR Index of Pending Sales (of existing single-family homes, condos, and co-ops) slipped 1.4 percent in June, influenced, in part, by limited choices due to a historically low inventory, according to NAR.

Multifamily building permits fell 5 percent to 246,000 in June from 260,000 in May. May’s level was the highest, and June’s is now the second highest, in over three and half years (based on a three-month moving average). Multifamily housing starts were unchanged in June at 210,000, remaining down from the three-and-a-half-year high in April of 230,000. Existing condo sales decreased by 7.8 percent to 470,000, 2 percent higher than in June 2011, but inventory experienced a similar decline, so supply remained steady at 6.8 months, below the long-term average of 7.5 months.

New foreclosure filings—default notices, scheduled auctions, and bank repossessions—fell almost 4 percent in June from a month earlier to 197,834, according to RealtyTrac. These filings are down 11 percent from a year earlier. RealtyTrac has noted: “Based on the rise in pre-foreclosure sales we’ve seen so far this year, a higher percentage of these new foreclosure starts will likely end up as short sales or auction sales to third parties rather than bank repossessions going forward.”

Home mortgage rates (30-year fixed) fell in July to 3.55 percent from 3.68 percent in June. July’s rate was the lowest monthly rate since record keeping began in 1971.



Apartment rents and hotel revenue per available room (RevPAR) show continued strong growth with apartment rents now surpassing their pre-recession high; rents in the industrial and office sectors are slowly inching up; retail rents are still declining. Office vacancy and retail availability rates are high but stable, industrial availability is high and inching down, and apartment vacancies are low. First-quarter hotel occupancy improved from a year earlier. Net absorption in the office sector was negative and was low by historical standards in the retail sector; net absorption in the apartment and industrial sectors is the strongest, although still down 21 percent and 16 percent from their historical averages, respectively. Completions in all sectors are extremely low by historical standards, though the apartment sector is the strongest at about one-third the long-term average. 

Office vacancy rates
stood at 16.0 percent in the first quarter of 2012, unchanged from the fourth quarter of 2011, according to CBRE. Rents crept higher for the fifth-straight quarter and are up 3.1 percent from a year earlier. Net absorption became negative after almost two years of positive growth, while completions remain low at 9 percent of the long-term average (since 1985).

Retail availability rates
 stood at 13.1 percent in the first quarter of 2012, registering no change from the fourth quarter of 2011 or the same quarter one year earlier, according to CBRE. Rents continued their four-year slide in the fourth quarter and are off 2.1 percent from a year earlier. Net absorption was down from the fourth quarter but positive for the third-straight month, at 1.02 million square feet; completions were down as well and at 8 percent of the long-term average (since 1980).

Industrial availability rates
 stood at 13.4 percent in the first quarter of 2012, continuing their slow but consistent seven-quarter decline; rates are now down 70 basis points from the same quarter a year earlier. Rents edged up but are off 0.4 percent from a year earlier. Net absorption was strong at 24.95 million square feet, although down from the previous quarter; completions were down and only 12 percent of the long-term average (since 1980).

Apartment vacancy rates
edged down to 5.1 percent in the first quarter of 2012 after a very slight bump up in the fourth quarter, and are 80 basis points lower than for the same quarter a year earlier. Rents were up 1.2 percent in the first quarter and are 4.9 percent higher than a year earlier. Completions in the first quarter of 2012 were up almost 2 percent and are at 35 percent of the long-term average (since 1994).

Hotel occupancy rates stood at 56.8 percent in the first quarter of 2012, up from 54.7 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.