ULI Center for Capital Markets and Real Estate

The top nine trends in this month’s Barometer point to low-level limbo in the economy, diverging signals in the capital markets, and renewed challenges in the housing market.
Compared with a year ago, 52 percent of the key indicators in the Barometer are better while 48 percent are worse.

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

In those top nine trends:

  • September’s private sector employment growth was more than twice that of August, after subtracting the effect of a short-lived strike at Verizon. That any employment growth took place in September is welcome news and even surprising, but this adjusted figure remains below the historical monthly average (since 1970). And the public sector continues to drop jobs, particularly in education, dragging down overall net employment growth.
  • Second-quarter 2011 GDP growth was revised upward to 1.3 percent in the final estimate but still describes a weak economy during that period; the second-quarter figure is just under half of the historical GDP quarterly average.
  • Consumer confidence was steady in September, at about half its January 2008 level, after a dramatic drop in August; still, total retail sales in August remained unchanged.
  • Total construction value put in place increased in August, approximating construction values seen in 2000; the increase was primarily in public sector construction.
  • NAREIT returns were down substantially in September in all sectors. Total one-year returns were almost flat, with the apartment sector showing the strongest positive returns and the lodging/resorts sector showing the steepest negative returns.
  • CMBS issuance in September more than doubled from the previous month, reversing the steep decline in August.
  • Commercial property prices continued to rise in July, according to the latest repeat-sales indices, but a third unpaired index indicated little or no change in July, August, and September; property transaction volumes were down just slightly in August, continuing the same level of monthly fluctuations seen over the past year.
  • Default notices—the initial phase of home foreclosure activity—were on the rise in August, most likely a signal that the slowdown resulting from objections to robo-signing is over and that bank repossessions will begin to increase again in the near future.
  • Existing single-family home sales jumped in August, which had the second-lowest monthly mortgage rates ever recorded; the lowest recorded rates were in September. Price indicators were mixed for July, and the one price indicator for August declined.



Though most not-so-bad news among economic indicators was tempered, some news was just bad. August’s job growth estimates were revised upward to show some net employment growth as opposed to the original flat estimate; September‘s figures were also positive, but were actually lower than officially reported due to the end of a short-lived strike. The final second-quarter GDP was revised upward, but is still showing a decidedly weak economy during that period. Retail sales in August managed to remain unchanged, even as consumer confidence fell precipitously that month; consumer confidence remained at the same low level in September. S&P returns were negative and 12-month returns were almost flat. Still, construction value increased, primarily in the public sector.

September’s net job growth of 103,000 jobs is an improvement over August’s but, as is often the case lately, there’s more than meets the eye. First, it is good news that August’s private sector figures were revised higher from an increase of 17,000 jobs to 42,000 jobs; August’s public sector employment was revised up from a net loss to an increase of 15,000 jobs, although that reflects not only the ramp-up for the school year but also the return of Minnesota state workers laid off for three weeks in July. In September, the net job growth was due to a gain of 137,000 jobs in the private sector but a loss of 34,000 jobs in the public sector. The private sector growth includes about 45,000 Verizon workers who had been on a short-lived strike in August, so that there were really 92,000 new private sector jobs. Private sector job gains occurred in professional and business services, health care, and construction. The decline in public sector employment was concentrated in education. Overall, 1.5 million jobs have been created since August 2010—only 22 percent of the 6.66 million lost since February 2008. The unemployment rate remained unchanged at 9.1 percent.

The final estimate of second-quarter 2011 GDP growth is 1.3 percent, less than one-half of the long-term quarterly average growth of 2.8 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 was essentially stable in September at 45.4, after a 25 percent drop in August. It is now just about half the January 2008 level of 87.3. Total retail sales were flat in August, the result of declines in the categories of apparel, motor vehicles, department stores, specialty stores, food services, and home furnishings and increases in all other categories. Actual retail sales volume—$390.5 billion—is up 7.2 percent over one year ago but exceeds the pre-recession peak of $378.4 billion (in November 2007) by only 2.9 percent.

The value of total private and public construction put in place increased 1.4 percent to $799.1 billion in August after a 1.4 percent dip in July. 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 0.4 percent in August, the same as the long-term monthly average (since 1970). All categories increased, with the largest increases in gasoline and apparel prices. The sole exception was new vehicle prices, which were unchanged. For the past 12 months, the CPI has risen 3.8 percent.

September’s S&P 500 returns were negative for the fifth-straight month, at –7.03 percent, after eight straight months of positive returns; year-over-year returns were essentially flat at 1.14 percent, in marked contrast to the long-term 12-month average of 10.6 percent.

Real Estate Capital Markets


Commercial property prices in the Moody’s and CoStar indices continued their recent upward trend while the Green Street index showed little or no movement. Transaction volumes continued to fluctuate but remained in the same range as seen in 11 of the last 12 months (the high transaction levels in May were an anomaly caused by one major acquisition). NAREIT returns were negative in August for all sectors. The CMBS market jumped substantially even as the CMBS delinquency rates inched up. Delinquency rates of all types of bank real estate loans declined in the second quarter but delinquency rates of construction and development loans remain dramatically high.

Capitalization rates, as reported by Real Capital Analytics, declined slightly to 7.03 percent in August, 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
slid slightly to $10.9 billion in August from $11.1 billion in July, according to Real Capital Analytics; monthly sales volumes over the last 12 months have averaged $12 billion. This excludes June’s high transaction level which was almost entirely due to Blackstone’s purchase of the retail assets of Centro Properties Group. August’s total numbers are 70 percent of the historical monthly average (since 2001); activity in each of two sectors–apartment and office sectors–was about double that in the industrial and retail 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, Boston, San Francisco, the Virginia suburbs of Washington, D.C., Washington, D.C, Houston, and Atlanta. Over $5.12 billion in transactions have been recorded in each of these cities since September 1, 2010.

The Moody’s/REAL Commercial Property Price Index jumped up 5 percent in July, the third-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 43 percent from their peak in October 2007; the index is up 1.2 percent from a year ago.

The Investment Grade Index of the CoStar Commercial Repeat-Sale Indices increased 2.4 percent in July, the fourth-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 32 percent from the peak value in July 2007 and up 6.8 percent from a year ago. The General Grade Index of the CoStar Commercial Repeat-Sale Indices increased 0.7 percent, also the fourth-straight month of growth; it is now down 33 percent from its peak value in August 2007 and down 3.4 percent from last year.

The GSA Commercial Property Price Index, based on estimates of private market values for REIT portfolios, had remained unchanged in July. It increased slightly in August and remained unchanged again in September.

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 fairly steep negative total returns in September of 11.0 percent, with almost flat total one-year returns at 0.9 percent. Total returns for the month by property sector range from –14.9 percent for the apartment sector to -7.2 for the lodging/resorts sector.

CMBS issuance
jumped from $1.82 billion in August to $4.27 billion in September, according to Commercial Mortgage Alert. CMBS delinquency rates, according to Trepp LLC, inched up to 9.56 percent in September, a return to a more typical rate of change after two months of volatility. Trepp attributed the jump in June to a particular classification system used by Special Servicers. In turn, subsequent reclassifications contributed to August’s decline.

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 historic average (since 1991) of 4.9 percent.



The single-family homebuilding industry is the smallest it’s been seen since record keeping began in 1963, in the case of sales and inventory, and in the 3rd percentile of permits and starts figures since 1970. The latest monthly changes should be viewed within the context of this low overall level of activity as well as the fluctuations over the last year: in August, permits rose, while starts, sales, and prices declined. Multi-family permits and starts are in the 15th percentile of figures since 1970: In August, multi-family permits were flat and starts declined. Existing single-family sales, in contrast, increased in August and are at a level last seen in 1998. Prices of existing homes showed several months of positive change through July, according to repeat transaction indicators, but the one unpaired indicator for both July and August showed some slippage.

The S&P/Case-Shiller Index for existing home prices rose 0.9 percent in July, the fourth-straight month of growth after eight months of decline, and is now 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) also rose in July for the fourth-straight month, by 0.8 percent, after ten straight months of decline; it is down 17 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 July showed a 2.5 percent decline in the median price of existing single-family homes, after four-straight months of increases, and in August prices fell further by 1.9 percent; median prices for existing single-family homes stood at $168,400, down 24 percent from the peak in 2006. Median prices for new single-family homes dropped 8.7 percent in August to $209,100. This follows a 4.0 percent drop in July; new home prices are now down 16 percent from the peak in 2007.

Single-family building permits
rose 3.0 percent in August after a fairly flat July from 403,000 in July to 413,000 in August. August’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 decreased slightly, 1.4 percent, from 423,000 in July to 417,000 and are now at 38 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. Both new single-family home sales volume and inventory are at lows not seen since record keeping began in 1963. For monthly sales, this has been true in each of the past 15 months; for monthly inventory, this has been true of the last 6 months.

The number of existing single-family home sales (seasonally adjusted) rose 8 percent to 4.47 million in August, above the long-term monthly average (since 1970); supply dropped from 9.0 to 8.3 months. August’s monthly sales were 71 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 1.2 percent in August, the second-straight month of decline.

Multifamily building permits were essentially flat at 178,000 in August and are now at 46 percent of the monthly average (since 1970). Multifamily housing starts decreased by 12 percent in August to 148,000. This represents only 42 percent of the monthly average (since 1970). Existing condo sales increased to 560,000, just below the long-term monthly average (since 1970); with a decrease in inventory, supply dropped from 13.1 to 10.5 months.

Housing affordability remains near historical highs.

Foreclosure filings—default notices, scheduled auctions, and bank repossessions—increased by 7 percent in August from a month earlier to 228,098, according to RealtyTrac, entirely due to a dramatic 33 percent increase in default notices. While July’s total filings had been the lowest monthly totals since November 2007, RealtyTrac notes, “The big increase in new foreclosure actions may be a signal that lenders are starting to push through some of the foreclosures delayed by robo-signing and other documentation problems. It also foreshadows more bank repossessions in the coming months as these new foreclosures make their way through the process.” Still, at this point, all stages of foreclosure filings are lower than they were one year ago.

Home mortgage rates (30-year fixed) fell in September to 4.11 percent, the lowest monthly rate since record-keeping began in 1971.



(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.