Summary
Disappointing reversals and changes are abundant in this month’s ULI Barometer, although there is a touch of positive news, as well.
Data from the housing sector were particularly bleak in July. Sales of existing homes fell dramatically to levels not seen in almost two decades, and new home sales are at their lowest level since 1962. Bank repossessions of homes were up and the months’ supply of existing housing has climbed. Building permits are down for all types of housing, and housing starts for single-family homes continued to decline. Still, existing single-family home prices look fairly stable, and default notices, the initial step in the foreclosure process, were steady for the third-straight month.
Commercial property prices also fell, following two months of increases, and the REIT sector saw negative total returns in August after July’s strong bounce-back. Property sales volume also declined, though it was well above recent lows. CMBS delinquency rates were the highest yet seen in the industry. Still, CMBS issuance saw some positive signs, and commercial mortgage spreads tightened in August.
Second-quarter GDP growth was revised downward and is now only at 43 percent of first-quarter growth.
Bright spots in the economy include the continuation of employment growth in the private sector; job growth in 2010 has now returned 10 percent of the 7.6 million jobs lost since January 2008. Consumer confidence and retail sales both increased after two straight months of decline.
The ULI Real Estate Business Barometer is a summary of more than 60 key indicators of the performance of the economy, real estate capital markets, housing, and commercial/multifamily investment property. More information can be found throughout the tabs and in the links to the right.
Economy
Key economic data are decidedly mixed, with marginally positive news. Private sector job growth continued in August, the seesawing consumer confidence index was up again for the first time in two months, and retail sales inched back up as well after two months of decline. However, increases in imports brought second-quarter GDP growth significantly lower than in the previous two quarters, and the S&P 500 returns were disappointingly negative in August.
The employment report continues to be heavily affected by the wrap-up of the 2010 U.S. census. The net loss of 54,000 jobs in August reflects the end of assignments for 114,000 temporary census workers and masks the creation of 67,000 private sector jobs. Private sector job growth in August was concentrated in health care, temporary help services, and construction (although the change in construction employment was partially due to the return of striking workers). With consistent positive private sector monthly growth since this January, private sector employment has grown by 763,000 jobs so far this year.
The unemployment rate in August edged up slightly to 9.6 percent as former census workers looked for jobs and the labor force participation rate increased slightly.
The revised estimate of the second-quarter 2010 GDP growth brought it substantially lower than initial estimates; second-quarter GDP growth is now 1.6 percent, only 43 percent of first-quarter growth. A major factor in the second-quarter growth figure was a sharp increase in imports, which are a negative in the GDP calculation. The current second-quarter 2010 estimate is much lower than the historical average (since 1970) of 2.9 percent.
The Consumer Confidence Index increased from 51.0 in July to 53.5 in August after two straight months of decline. Retail sales increased 0.4 percent after two straight months of decline, as well.
Inflation, as measured by the Consumer Price Index, rose slightly by 0.3 percent in July, driven by increases in gasoline prices and household energy costs.
The S&P 500 index fell 4.5 percent in August, reverting to the declines seen in May and June. Year-over-year returns are down to just 4.9 percent as of the end of August.
Real Estate Capital Markets
The real estate capital markets had a tough month as previous positive changes slowed or reversed. Commercial property prices declined, REIT returns were negative, and CMBS delinquencies continued their rise. Still, recent increases in property sales volumes were sustained, although they remain near historically low levels.
The REIT sector saw negative total returns again in August—of –1.4 percent—after July’s strong bounce-back from two months of negative total returns. Total returns for the past year are down from recent 12-month returns, but are still healthy at 33 percent.
CMBS issuance was active once again in August, according to Commercial Mortgage Alert, after being nonexistent in July. The $1.45 billion total issuance includes the third CMBS securities offering backed by multi-borrower loans this year, priced at $788.5 million. CMBS delinquency rates, according to Trepp LLC, rose to 8.92 percent, the highest rate in the history of the CMBS industry. Since April 2009, each successive month has seen a new historic high in delinquency rates.
Property sales volumes decreased in July to $7.4 billion from $9.6 billion in June, according to Real Capital Analytics, but were still higher than the monthly activity from January to May and are double the activity in July 2009.
The Moody’s/REAL Commercial Property Price Index declined 4.0 percent in June, following two months of increase. (This index is reported monthly as a three-month moving average, with a two-month lag.) Values are down 9.1 percent from a year ago and down 41.4 percent from the October 2007 peak.
Capitalization rates remained fairly steady at 7.53 percent in July, similar to June’s level of 7.56. Cap rates remain above the 6.39 percent of June 2007, and are similar to the historical norm of 7.6 percent (since 2001).
As noted in last month’s Barometer, the NCREIF Property Index turned in the second positive quarter in 2010, with total returns of 3.31 percent; total returns for the past year are –1.5 percent.
For additional commentary on real estate capital markets, see ULI senior fellow Steve Blank’s Capital Markets articles.
Commercial/Multifamily
Note: The commentary and data outlined below and in the accompanying table are the same as that presented last month because all the information is quarterly data.
Vacancy and rental rates across all property types stabilized in the second quarter, continuing a trend seen in the first quarter of 2010. With this leveling off, rents are now between 7 percent and 19 percent below their pre-recession peak—apartment rents are down 7 percent from their peak, office rents are down 12 percent, retail rents down 13 percent, warehouse rents are down 14 percent, and the hotel rev/par index is down 19 percent. Vacancy rates remain well above historic norms.
Office vacancy rates stood at 19.6 percent in the second quarter of 2010, the same as in the first quarter, and just 110 basis points above the second quarter a year ago, according to Property & Portfolio Research (the source of all data presented in this section). Completions in the second quarter were up as a percentage of inventory, increasing from 0.1 percent in the first quarter to 0.2 percent, although both quarters are substantially below the historical average of 0.7 percent. The absorption of 7.1 million square feet was a significant improvement from the –7.76 million square feet absorbed in the first quarter and the –39.3 million square feet absorbed in the second quarter a year ago. Rents remained stable and are off 4.9 percent from the same quarter a year ago.
Retail vacancy rates stood at 19.2 percent in the second quarter of 2010, down slightly from 19.4 percent in the first quarter and just 170 basis points above the same quarter a year ago. Completions in the second quarter of 2010 as a percent of inventory were 0.1 percent, the same as in the first quarter and below the 0.6 percent historical average. Rents remained stable in the first quarter and are off 5.4 percent from the same quarter a year ago.
Warehouse vacancy rates stood at 13.2 percent in the second quarter of 2010, down slightly from 13.3 percent in the first quarter and 100 basis points above the same quarter a year ago. Completions in the second quarter of 2010 stood at 0.1 percent of inventory, up from virtually no activity in the previous quarter and below the 0.6 percent historical average. Rents stayed about the same and are off 6.8 percent from the same quarter a year ago.
Apartment vacancy rates stood at 8.1 percent in the second quarter of 2010, down slightly from the first quarter and 10 basis points below the same quarter a year ago. Completions in the second quarter of 2010 stood at 0.1 percent of inventory, the same as in the previous quarter and below the 0.4 percent historical average. Rents remained stable in the first quarter and are off 2.5 percent from the same quarter a year ago.
Hotel occupancy rates (a moving 12-month average) stood at 59.8 percent in the second quarter of 2010, as they did in the same quarter a year ago. Completions were down slightly as a percentage of rooms, from 3.1 percent in second-quarter 2009 to 2.6 percent, but remained above the historical average of 2.3 percent. The Index of Revenue per Available Room (RevPar Index) was up 6.4 percent from the same quarter of 2009.
Housing
Sales of existing homes fell dramatically to levels not seen in almost two decades, and new home sales are at their lowest since 1962. Bank repossessions are up and the months’ supply of existing housing has climbed. Building permits are down for all types of housing, and housing starts for single-family homes continue to decline. Prices of existing single-family homes are looking fairly stable while new home prices fell again.
Single-family building permits fell for the fourth straight month—a 1 percent decline from 421,000 in June to 416,000 in July, the lowest level since April 2009. Over the past 12 months, monthly single-family permits have bounced between 42 percent and 55 percent of the monthly average (since 1970), with July’s permits at 42 percent.
Multifamily building permits also declined in July after a jump in June, decreasing by 9 percent from 142,000 permits in June to 129,000 in July. Over the past 12 months, monthly multifamily permits have bounced between about 25 percent and 35 percent of the monthly average (since 1970), with July’s permits at 32 percent.
Single-family housing starts continued to decline for the third straight month, with a 4 percent slide to 432,000 in July from 451,000 in June. July’s starts are 39 percent of the monthly average (since 1970) for single-family housing starts, down from April’s starts at 51 percent of the monthly average.
Multifamily housing starts increased by 17 percent after a dramatic 31 percent retreat in June. Multifamily housing starts in July stood at 95,000, representing 27 percent of the monthly average (since 1970). The peak this year was in May, when multifamily housing starts were at 33 percent of the long-term monthly average.
Prices for new homes dipped again in July to $204,000, bringing new home prices to just below prices for March 2009 and making July’s prices the lowest since the beginning of the recession.
The S&P/Case-Shiller Index for existing home prices barely changed, but the direction was positive for the third straight month after a six-month decline; the June index is now 4.2 percent higher than it was 12 months earlier. (This index is reported monthly as a three-month moving average, with a two-month lag.) Data from the National Association of Realtors (NAR) showed existing single-family home prices virtually stable in July after increasing by 5.2 percent in June, and prices are 0.9 percent above where they were in July 2009. Prices of existing condominiums edged downward, according to NAR, and are 1.7 percent lower than last July. Housing affordability remains near historic highs.
The number of existing single-family home sales (seasonally adjusted) fell 27 percent in July, continuing the decline that started in May, immediately after the expiration of the homebuyer tax credit. July’s sales of 3.37 million existing homes were at a low not seen since 1992. With sluggish sales and a slight increase in inventory over the same period, supply jumped from 8.6 months to 11.9 months. Existing condo sales fell 28 percent to 460,000, a low not seen for over a decade, and monthly supply jumped from 10.7 months to 16.5 months. New single-family home sales (seasonally adjusted) have bounced around, with a 12 percent decline in July, following a 12 percent increase in June and a dramatic 32 percent drop in May. Sales of new single-family homes in May, June, and July were at the lowest level since records began in 1963. With decline in sales but little change in inventory, the supply increased to 9.1 months from 8.0 months.
Foreclosure filings—default notices, scheduled auctions, and bank repossessions—increased nearly 4 percent in July after two months of declines. July’s increase was due primarily to an 8.6 percent increase in bank repossesions; this brought the number of repossessions back to the high levels seen in the spring as banks work their way through the inventory of earlier phases of foreclosure proceedings. Default notices in July remained about the same as in June while scheduled auctions increased by 2.4 percent.
New default notices are down 28 percent from 12 months ago and auctions are down 2 percent, but repossessions are up 6 percent from a year ago.
One bright spot is that home mortgage rates (30-year fixed) remained very low, and were at 4.43 percent in August.
