Summary
Apartment fundamentals are sizzling as rents and vacancy rates continued to improve; completions continued their U-shaped recovery, and absorption doubled. Commercial property transactions dropped sharply in all but the office sector, where transactions were just slightly off; prices barely changed, remaining at three-year highs. Economic indicators, at best, point to a pause in near-term optimism.
Note: More commentary and data can be found throughout the tabs and in the accompanying tables.
Overall, 78 percent of the key indicators in the Barometer are better than a year ago.
The top 10 trends in this month’s Barometer:
- Despite a slight upward revision in second-quarter GDP growth estimates, growth has progressively slowed for two straight quarters. Monthly employment growth has now been significantly lower in the past six months than at the beginning of the year.
- Commercial property transaction volumes dropped; prices barely improved, according to repeat-sales indices, although they are up nearly 10 percent from a year ago. Total REIT returns were barely positive.
- Monthly cap rates slipped to their lowest level since mid-2008 as pricing remains aggressive; cap rates and are only 30 basis points above their lowest recorded level (since 2001).
- CMBS issuance plummeted after a relatively strong three-month streak; delinquency rates dropped from a historical high in the previous month, registering the largest one-month decline since last November.
- Starts in both the single-family and multifamily sectors paused, while multifamily permits increased to their highest monthly level since September 2008 and single-family permits rose to two-year highs. The inventory of new single-family homes is at its lowest level since record-keeping began in 1963.
- The pace of price recovery is strong overall for existing single-family homes despite a slight dip reported by one source, although prices are still considerably below their peak. The Index of Pending Home Sales is at its highest level since the expiration of the first-time homebuyer credit over two years ago.
- Apartment fundamentals, already strong, strengthened further with sustained rent growth, a vacancy rate decline, and a doubling of absorption.
- Office and industrial fundamentals are slowly improving as rents inch up and vacancy and availability rates inch down, and absorption is strong. Hotel occupancy has just about returned to its pre-recession high and RevPAR has exceeded the high registered before the recession.
- Retail fundamentals remain weak. Rents continue to decline and, although availability rates improved somewhat, they remain high. Space absorption in retail is the weakest among all sectors at less than half the historical quarterly average.
- Completions in the office, retail, and industrial sectors are near historical lows at about 11 percent of each sector’s long-term average. In sharp contrast, completion of apartments is over 80 percent of that sector’s historical average.
(For annual projections of key Barometer indicators, see the new ULI Real Estate Consensus Forecast. The next update is due out September 19, 2012)
Economy
GDP growth remained discouragingly weak in the second quarter despite an upward revision, the manufacturing sector continued to show signs of contraction, and private construction fell. Employment growth was lower in August than in July and was significantly below the level seen last winter. Bright spots included strong retail sales and positive S&P returns.
Net job growth
in August of 96,000 jobs was made up of 103,000 private sector jobs gained and 7,000 public sector jobs lost. The country has 4.7 million fewer jobs than it did four and a half years ago. At August’s growth rate, it would take over four years to regain just those 4.7 million jobs. Private sector job gains in August were greatest in food services and drinking places, professional and technical services, health care and social assistance, and finance and insurance. The overall unemployment rate in August moved down to 8.1 percent from 8.3 percent in July as the size of the labor force contracted.
The second estimate of second-quarter GDP growth is 1.7 percent, down from 2.0 in the first quarter and substantially below the fourth-quarter 2011 rate of 4.1 percent. The deceleration in the second quarter primarily reflected a slower growth rate in personal consumption expenditures, residential fixed investment, and nonresidential fixed investment. These were partly offset by a smaller decrease in federal government spending, acceleration in exports, and a smaller decrease in private inventory investment.
The Consumer Confidence Index declined 4.8 points in August to 60.6, the lowest level since November 2011. It is at 31 percent below the pre-recession level (in January 2008) of 87.3. Total retail sales in July were up 0.8 percent, reversing three straight months of decline. Sales in all major categories were strong in July, with the strongest growth in health and personal care stores, building materials/gardening equipment, and electronics. Retail sales of $403.9 billion are 4.1 percent higher than those of a year ago but exceed the pre-recession peak of $378.4 billion (in November 2007) by only 6.7 percent.
The value of private construction put in place declined by 1.2 percent in July, although it is 15 percent higher than a year ago. Public construction put in place declined just slightly, 0.4 percent. July’s total construction value of $834.4 billion is down 31 percent from the pre-recession high in March 2006, with private construction down 42 percent.
Inflation, as measured by the Consumer Price Index, was unchanged in July for the second-straight month. The decline of 0.3 percent in energy offset 0.1 percent increases in food and all items less food and energy categories. In the energy category, price declines for electricity, natural gas, and fuel oil more than offset a small increase for gasoline. For the past 12 months, the CPI has risen 1.4 percent.
Monthly S&P 500 returns were positive in August—up 2.3 percent—above the long-term monthly average of 0.9 percent. Year-over-year returns were strong at 18.0 percent.
The Purchasing Managers’ Index declined in August, moving from 49.8 percent in July to 49.6 percent—levels that indicate contraction in the manufacturing sector for the third-straight month, 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 slow: commercial property transactions dropped and property prices barely moved, according to repeat-sales indices, although they are up from a year ago; REIT monthly total returns were barely positive; and CMBS issuance plummeted. The good news is the continuing decline in bank real estate loan delinquency rates and the apparent start of a decline in CMBS delinquency rates.
Capitalization rates, as reported by Real Capital Analytics (RCA), slipped to 6.84 percent in July, their lowest level since September 2008 and only 30 basis points above their lowest level recorded (since 2001), reached in mid-2007. As reported by NCREIF in last month’s Barometer, 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 level (since 1978), reached in the first quarter of 2008.
Commercial property sales volumes
(excluding land and hotels) fell 42 percent to $12.2 billion in July, according to RCA, below the long-term average (since 2001). Transactions declined substantially in all sectors with the exception of the office sector, where transactions declined by only 6.8 percent.
The ten most active sales markets in the past 12 months accounted for 43 percent of all transactions, the same share of the total market as last month. The markets were, in descending order, Manhattan, Los Angeles, Chicago, Boston, Dallas, San Francisco, Houston, Seattle, the Virginia suburbs of Washington, D.C., and Atlanta, according to RCA. Over $6 billion in transactions have been recorded in each of these cities since August 1, 2011.
The Moody’s/RCA Commercial Property Price Index edged up 0.5 percent in June from May; this brings the figure to 10.3 percent above its level a year ago and to its highest level since January 2009. (This is a same-property index based on all U.S. transactions over $2.5 million.) Values are now down 21 percent from the peak value in December 2007.
The new value-weighted composite CoStar Commercial Repeat-Sale Index barely changed, with a move up of less than 0.1 percent in June; with this slight movement, the index is up 8.7 percent from a year ago. So far this year, June’s index level—which was the highest level since February 2009—was reached in three of the six months. (These indices are based on a repeat-sales methodology that tracks transactions over $100,000 and includes land sales.) Values are down 20 percent from the peak value in January 2008.
The GSA Commercial Property Price Index, based on estimates of private market values for REIT portfolios, moved up 1.6 percent in August. Over the past 12 months, the GSA Price Index has increased just 5.2 percent, although it is down just 4.2 percent from its peak value in August 2007.
As reported in last month’s Barometer, 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 barely positive at 0.02 percent in August. Returns for individual core sectors ranged from the industrial and lodging/resorts sectors at 4.5 percent and 3.0 percent, respectively, to retail at 2.5 percent, office at 0.4 percent, and apartments at –3.5 percent. (In noncore sectors, negative returns were seen in the health care, self-storage, and manufactured housing sectors). One-year total returns as of August stood at 20.2 percent.
CMBS issuance
fell 61 percent to $1.7 billion in August after exceeding $4.2 billion for three straight months, according to Commercial Mortgage Alert. According to Trepp LLC, CMBS delinquency ratesdropped from a record high of 10.34 percent in July to 10.13 percent in August as more loan resolutions took place and most of the five-year loans that were securitized in 2007 have now passed their maturity date.
Bank real estate loan delinquency rates continued to fall in the second quarter. Commercial and multifamily mortgage delinquency rates are now 3.34 percent and 2.03 percent, respectively. Construction and development loans have the highest delinquency rate at 10.81 percent, substantially above the quarterly historical average (since 1991) of 5.3 percent.
Housing
Multifamily permits were at their highest monthly level since September 2008 and single-family permits rose to two-year highs, but starts in both sectors paused. Sales of new homes increased and are substantially higher than they were one year ago, but the industry remains historically small, and prices slipped. The pace of price recovery is strong for existing homes, although prices remain considerably below their peak. Apartment rents continue to climb past their peak. Home sales picked up, continuing the zigzag pattern of the past year, and the forward-looking National Association of Realtors (NAR) Index of Pending Home Sales is at its highest level since the expiration of the first-time homebuyer credit over two years ago.
Existing single-family home prices rose for the third-straight month, according to the S&P/Case-Shiller Index (which tracks repeat sales in 20 cities), with a healthy 2.3 percent increase in June; prices are now up 0.5 percent from one year ago. The growth rates in May and June were the same and were the highest monthly growth rates since mid-2004. Still, prices remain 31 percent below 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) rose for the fifth-straight month, climbing 1.2 percent in June; it is now up 3.7 percent from a year ago. The monthly increases of the previous three months were the largest in 21 years, while June’s slightly lower increase is one of the largest in seven years. The Index remains down 15 percent from its peak in June 2007.
NAR
data (monitoring individual, unpaired transactions for the entire country) for existing single-family home prices fell slightly in July, down 0.8 percent, after four straight months of substantial increases. Those four months (March through June) together accounted for the longest sustained period of strong price growth in over 40 years—totaling a whopping 21 percent. Median prices for existing single-family homes stood at $188,100 in July and, despite the slight drop, almost 10 percent higher than one year ago. Prices are now 15 percent below the peak in 2006.
New single-family home prices
declined by 2.5 percent to $224,200 in July. Prices have seesawed over the past year and are now down 4.3 percent from July 2011, although down just 9.6 percent from the peak in 2007.Single-family building permits were up 2.7 percent in July (an annual rate based on a three-month moving average) to 498,000. Permits have increased each of the past 15 months and are at their highest level in over two years. Still, July’s permit numbers are 72 percent below the pre-recession high in November 2005. Single-family housing starts were essentially unchanged in July (on a three-month moving average), down just 0.1 percent to an annualized rate of 517,000—now the second-highest level in 26 months; starts are 71 percent below the pre-recession high in November 2005.
Sales of new single-family homes
rose 3.6 percent in July and are now 25 percent higher than a year earlier; still, monthly sales volume for the past 24 months remains among the lowest seen since record keeping began in 1963. Sales are 73 percent below the pre-recession high in July 2005. Inventory in July slipped by less than 1 percent from June, registering the lowest monthly figure since record keeping began.
Sales of existing single-family homes (seasonally adjusted) increased 2.1 percent in July to 3.98 million, almost 10.0 percent higher than those of a year earlier. July’s monthly sales were 37 percent below the pre-recession high in September 2005. Inventory remained unchanged in July, so supply fell slightly to 6.3 months, lower than the historical average. The forward-looking NAR Index of Pending Sales (of existing single-family homes, condos, and co-ops) rose 2.4 percent in July to its highest since the first-time homebuyer credit ended in April 2010.
Multifamily building permits increased 6.4 percent to 265,000 in July, more than reversing June’s dip to 249,000 permits. July’s level is the highest in almost four years (based on a three-month moving average). Multifamily housing starts were down 1 percent in July to 205,000, the third month of retreat from the three-and-a-half-year high of 230,000 reached in April.
The rent index for apartments, reported quarterly by CBRE, was up 1.1 percent in the second quarter of 2012 to $1,293, which is 5.0 percent higher than a year earlier. Apartment vacancy rates, reported quarterly by CBRE, edged down to 4.8 percent in the second quarter of 2012, continuing a fairly consistent two-and-a-half-year slide.
Existing condo sales increased in July by 4.3 percent to 490,000, 14 percent higher than in July 2011, but inventory also increased, so supply jumped from 6.8 months to 7.2 months.
New foreclosure filings—default notices, scheduled auctions, and bank repossessions—fell almost 3 percent in July from a month earlier to 191,925, according to RealtyTrac. These filings are down 10 percent from a year earlier. RealtyTrac has noted: ““Recent foreclosure activity patterns vary significantly from state to state, often hinging on the level of dysfunction that exists in each state’s foreclosure process. In states like Florida, Illinois, and New Jersey, where processing and procedural issues slowed foreclosure activity to a crawl last year, foreclosure numbers continue to rebound off those artificially low levels. But in states like Texas, Arizona, and Virginia, where the average time to foreclose is well below the national average of 378 days, foreclosure activity continues on a long-term downward trend.”
Home mortgage rates (30-year fixed) rose slightly from 3.55 percent in July to 3.60 percent in August. July’s rate was the lowest monthly rate since record keeping began in 1971.
Commercial/Multifamily
Apartment rents continue to climb past their pre-recession highs, and hotel RevPAR is now back at its pre-recession high; rents in the industrial and office sectors are slowly inching up, but retail rents are still declining. Office vacancy rates moved down closer to their long-term average, retail and industrial availability rates remain high but are inching down, and apartment vacancies are low and moving lower. Second-quarter hotel occupancy improved from a year earlier. Net absorption doubled in the apartment sector and was strong in the office and industrial sectors; retail absorption remained improved but remained weak by historical standards. Completions in all sectors are extremely low by historical standards, with the exception of the apartment sector, which is at about four-fifths of the long-term average.
Office vacancy rates
edged down to 15.7 percent in the second quarter of 2012 from 16.0 percent in the first quarter, according to CBRE. This was the first time in three years that vacancy rates have been below 16 percent. Rents crept up 1.3 percent, the sixth-straight quarter of rent growth, and are up 2.8 percent from a year earlier. Net absorption was 12.7 million square feet, the largest quarterly gain in five years, while completions remain low at 12 percent of the long-term average (since 1985). barely changed, notching down from 13.1 percent in the first quarter to 13.0 percent in the second quarter, according to CBRE. Availability rates have fluctuated between 13.0 percent and 13.2 percent for over two years. Rents continued their four-and-a-half-year slide in the second quarter and are off 1.8 percent from a year earlier. Net absorption was up from the first quarter and positive for the fourth-straight month at 4.1 million square feet; completions were up slightly and stood at 11 percent of the long-term average (since 1980). stood at 13.2 percent in the second quarter of 2012, continuing their slow but consistent eight-quarter decline; rates are now down 80 basis points from the same quarter a year earlier. Rents edged up for the second-straight quarter but are still barely above the 14-year low reached in the last quarter of 2011. Net absorption was strong at 26.5 million square feet, although down from the previous quarter; completions were down slightly and stood at only 11 percent of the long-term average (since 1980). edged down to 4.8 percent in the second quarter of 2012, continuing a fairly consistent two-and-a-half-year slide. Rents were up 1.1 percent in the second quarter and are 5.0 percent higher than a year earlier. Completions in the first quarter of 2012 were up a whopping 135 percent to 34,784 units. This is the highest quarterly level in three years and it is now at 83 percent of the long-term average (since 1994).Hotel occupancy rates stood at 65.1 percent in the second quarter of 2012, up from 63.2 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.
