ULI Center for Capital Markets and Real Estate

The top ten trends in this month’s Barometer point to a less-than-dynamic economy, some solid signals in the capital markets, mixed property fundamentals and a surprise in the otherwise weak housing market. Compared with a year ago, 65 percent of the key indicators in the Barometer are better, 33 percent are worse, and 2 percent stayed the same.

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

In those top ten trends:

  • September’s private sector employment growth was disappointing and ineffective against the high unemployment rate. The public sector continues to drop jobs, particularly in state government, dragging down overall net employment growth.
  • Third-quarter 2011 GDP growth was 2.5 percent in the advance estimate, almost twice the growth rate of the second quarter. Even with this refreshing improvement, it still indicates a lethargic economy; the third-quarter figure is lower than the historical GDP quarterly average.
  • Consumer confidence dropped in October and is less than half its January 2008 level; total retail sales grew in September, a month when consumer confidence was stable.
  • Total construction value put in place barely increased in September, and now approximates construction values seen in 2000.
  • NAREIT returns were up substantially in October in all sectors, with the industrial and lodging/resorts sectors showing the strongest returns. Industrial returns were at least double those of the multifamily sector and retail sectors.
  • NCREIF returns were up slightly in the third quarter, with similar returns in all sectors.
  • CMBS issuance in October plummeted, continuing the volatility of the previous two months, and delinquency rates are close to historic highs.
  • Commercial property prices continued to rise in August, according to the latest repeat-sales indices, but a third unpaired index indicated little or no change in August, September, and October; property transaction volumes were up in September and are now at the level of the long-term monthly average.
  • Rents in the multi-family sector increased in the third quarter and are now close to pre-recession highs; apartment vacancy rates are the most improved of all sectors. Rents in the retail, office and industrial sectors remain more than 10 percent off from their pre-recession peak.
  • Multifamily housing starts jumped in September to a monthly level not seen since September 2008.



The advance estimate of GDP growth is welcome news relative to the previous two quarters, but still indicates a lack of energetic economic growth. Job growth continues but remains disappointing and ineffective against the high unemployment rate. Retail sales in September enjoyed a good month, with much of the improvement concentrated in automobile sales, and consumer confidence was fairly stable that month; consumer confidence fell substantially in October. Construction value just barely moved upward and the S&P returns were positive for the first time in five months.

October’s net job growth of 80,000 jobs is a disappointment, made even more so by comparison to September’s gain of 158,000 jobs. Private sector job gains occurred in professional and business services, leisure and hospitality, health care, and mining. The decline in public sector employment was concentrated at the state level. Overall, 1.5 million jobs have been created since August 2010—only 23 percent of the 6.48 million lost since February 2008. The unemployment rate slipped only slightly, going from 9.1 percent in September to 9.0 percent in October.

The first estimate of third-quarter 2011 GDP growth is 2.5 percent, a welcome improvement over the second-quarter growth of 1.3 percent. Still, it is lower than the long-term quarterly average (since 1976) of 2.8 percent. Factors contributing to the third-quarter growth were personal consumption of services and durable goods, nonresidential fixed investment, exports, 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.

The Consumer Confidence Index fell substantially in October to 39.8, the lowest it has been since early 2009. It is now less than half the January 2008 level of 87.3. Total retail sales were healthy in September, up 1.1 percent, led by an increase in automobile sales. Actual retail sales volume—$395.5 billion—is up 7.9 percent over one year ago but exceeds the pre-recession peak of $378.4 billion (in November 2007) by only 4 percent.

The value of total private and public construction put in place increased for the second-straight month, although barely at 0.2 percent. September’s construction value of $787.2 billion is about two-thirds of the pre-recession high in March 2006.

Inflation, as measured by the Consumer Price Index, was 0.3 percent in September, lower than the long-term monthly average (since 1970) of 0.4 percent. The increase was due almost entirely to a rise in energy and food costs. For the past 12 months, the CPI has risen 3.9 percent.

September’s S&P 500 returns were positive for the first time in five months, at 10.9 percent; year-over-year returns were up at 8.1 percent after an essentially flat August.

Real Estate Capital Markets


Commercial property prices in the Moody’s index continued their recent upward trend while the Green Street index showed little or no movement. Transaction volumes increased and were about at the historic monthly average (since 2001). NCREIF had a positive third quarter and NAREIT returns were positive in October. CMBS issuance fell substantially and the CMBS delinquency rates inched up.

Capitalization rates, as reported by Real Capital Analytics, were unchanged at 7.10 percent in September and are at the lowest level since December 2008. NCREIF’s capitalization rates declined from 6.10 percent in the second quarter to 5.81 percent in the third quarter, the lowest since third quarter 2008.

Commercial property sales volumes jumped to $15.3 billion in September from $12.4 billion in August, according to Real Capital Analytics, approximating the long-term monthly average (since 2001). The office sector was most active with 38 percent of the transaction volume.

According to Real Capital Analytics, the ten most active sales markets in the past 12 months account for almost 50 percent of total transaction volumes. These markets are, in descending order: Manhattan, Los Angeles, Chicago, Dallas, San Francisco, Boston, Atlanta, the Virginia suburbs of Washington, D.C., Houston, and Washington, D.C. Over $5.60 billion in transactions have been recorded in each of these cities since October 1, 2010.

The Moody’s/REAL Commercial Property Price Index was up 2.4 percent in August, the fourth-straight month of growth after reaching the lowest value since the index’s inception (in 2001) in April. (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 41 percent from their peak in October 2007 but up 7.2 percent from a year ago.

The GSA Commercial Property Price Index, based on estimates of private market values for REIT portfolios, was up 1.1 percent in August, although it had been flat for the two previous months. It was unchanged again in September and remained unchanged again in October. It has increased only 1.1 percent over the past six months.

The NCREIF Property Index turned in a positive third quarter, with total returns of 3.3 percent, sustaining the positive returns started in the first quarter of 2010. The capital appreciation component was 1.8 percent for the quarter. Total 12-month returns are now 16.1 percent. Total returns for the quarter by property sector range from 2.0 percent for the lodging/resorts sector to 3.6 percent for apartments.

After a dismal September, the REIT sector turned in strong total returns in October of 14.1 percent. One-year returns, which were almost flat in September, are now at 10.2 percent. Total returns for the month by property sector range from 11.3 percent for the office sector to 20.6 percent for the industrial sector and 26.0 percent for the lodging/resorts sector.

CMBS issuance fell dramatically from $4.27 billion in September to $770 million in October, according to Commercial Mortgage Alert. CMBS delinquency rates, according to Trepp LLC, increased to 9.77 percent in October, second only to July’s historically high (since 1999) delinquency rate of 9.88.

As reported in last month’s Barometer, bank real estate loan delinquency rates fell in the second quarter. Commercial and multifamily mortgage delinquency rates are 4.05 percent and 3.33 percent, respectively. Construction and development loans have the highest delinquency rate at 15 percent, substantially above the quarterly historical average (since 1991) of 4.9 percent.



Starts and sales of new single-family homes increased in September, while permits were fairly stable and prices declined. When considering both positive and negative monthly news, keep in mind that this industry is about the smallest it has been in over 40 years. Activity in the multifamily industry has been extremely low by historical standards, but the big surprise in September was multifamily starts, which reached the highest monthly level since September 2008. Existing single-family sales fell and the Index of Pending Sales fell for the third-straight month. Prices of existing homes, from sources that cover the entire country, showed declines in August, while a source focused on 20 of the largest cities shows increases. Countrywide data for September showed further declines.

The S&P/Case-Shiller Index for existing home prices rose 0.2 percent in August, the fifth-straight month of growth, bringing it to 4 percent above its post-recession low in March of this year; however, it is down 31 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) declined in August for the second-straight month, by 0.5 percent, still 3 percent above its post-recession low in March of this year; it is down 19 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 the entire country) for August showed a decline for the second-straight month, by 0.3 percent, in the median price of existing single-family homes, and in September prices fell an additional 3.3 percent; median prices for existing single-family homes stood at $165,600, still 5 percent above the post-recession low in February but down 25 percent from the peak in 2006. Median prices for new single-family homes dropped 3.1 percent in September to $204,400. This follows an 8.8 percent drop in August; new home prices are now at the same level as the post-recession low in October 2010 and down 18 percent from the peak in 2007.

Single-family building permits were fairly stable in September, sliding down only 0.2 percent to 417,000. September’s permit numbers remain at 43 percent of the historical monthly average (since 1970) and 23 percent of the pre-recession high in September 2005. Single-family starts rose slightly, almost 2 percent, from 418,000 in August 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 jumped an impressive 6 percent in September after a flat August and declines in the previous three months. Both new single-family home sales volume and inventory are still at lows not seen since record keeping began in 1963. For monthly sales, this has been true in each of the past 17 months; for monthly inventory, this has been true of the past seven months.

The number of existing single-family home sales (seasonally adjusted) fell 4 percent in September to 4.33 million after a 9 percent jump to 4.49 million in August; still, September’s numbers exceed the long-term monthly average (since 1970). With a decrease in inventory, supply stayed the same at 8.2 months. September’s monthly sales were 68 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 almost 5 percent in September, the third-straight month of decline.

Multifamily building permits fell 13 percent to 158,000 in September and are now at 41 percent of the monthly average (since 1970). Multifamily housing starts increased 53 percent in September to 227,000, the highest figure for a single month since September 2008. This represents 64 percent of the monthly average (since 1970). Existing condo sales increased to 580,000, above the long-term monthly average (since 1970); with an increase in inventory, supply increased from 10 to 11 months.

September was one of the three best months for housing affordability since NAR began its index in 1989. The other two months were this past January and February.

Foreclosure filings—default notices, scheduled auctions, and bank repossessions—increased by 7 percent in October from a month earlier to 230,678, according to RealtyTrac. The monthly number of new foreclosures has seesawed since June; RealtyTrac attributes this, in part, to various new state court rulings and state laws. At this point, foreclosure filings are 31 percent lower than they were one year ago.

Home mortgage rates (30-year fixed) fell in September to 4.07 percent, the lowest monthly rate since record-keeping began in 1971.



Rents in the third quarter changed little in the retail, office and industrial sectors while year-over-year changes show rent declines in the retail and industrial sectors; rates are now off 12, 16, and 17 percent, respectively, from their pre-recession peak. Vacancy and availability rates for these sectors changed little in the third quarter as well, but the office and industrial sector saw improvement over the same quarter one year ago. Apartment rents increased in both the third quarter and over the year and are now about the same as the pre-recession high. Apartment vacancy rates experienced the largest positive movement of all property sectors.

Office vacancy rates stood at 16.2 percent in the third quarter, unchanged from the second quarter of 2011 and just below 16.7 percent in the same quarter one year ago, according to CBRE. Rents remained relatively stable and are up just 0.9 percent from the same quarter a year ago. The net absorption stood at 3.3 million square feet of space, less than half that of the previous quarter.

Retail availability rates stood at 13.2 percent in the third quarter, little changed from 13.3 percent in the second quarter of 2011 and 13.1 percent in the same quarter one year ago, according to CBRE. Rents inched down in the third quarter and are off 3.7 percent from the same quarter a year ago. The net absorption was positive at 3.5 million square feet, a reversal of the second quarter’s negative net absorption of almost 3.0 million square feet.

Industrial availability rates stood at 13.7 percent in the third quarter, little changed from 13.9 percent in the second quarter of 2011 but 80 basis points below the figure for the same quarter a year ago. Rents stayed the same and are off 1.2 percent from the same quarter a year ago. Net absorption remained strong at 34.6 million square feet, increasing almost 31 percent over the previous quarter.

Apartment vacancy rates stood at 5.0 percent in the third quarter, down from 5.4 percent in the second quarter and 40 basis points below the figure for the same quarter a year ago. Rents were up 1.3 percent in the third quarter and are 4.7 percent above rents of the same quarter a year ago. Completions in the second quarter of 2011 stood at 14,647 units, up from both the previous quarter and the same quarter a year ago.

Hotel occupancy rates stood at 6.5 percent in the third quarter of 2011, up from 63.9 percent in the same quarter a year ago, according to Smith Travel Research. The RevPAR Index was up 7.9 percent from the same quarter of 2010.