The summary of the Urban Land Institute Real Estate Business Barometer for this week.
Key news in the latest ULI Barometer includes a number of economic improvements tempered by some weak or worsening indicators. These, together with the recent Greek debt crisis and early May’s stock market volatility, suggest further unpredictability and slower-than-desired expansion ahead.
Job growth in April was strong but not enough to bring the unemployment rate down. Unemployment even ticked higher as discouraged workers re-started their job search. GDP growth in the first quarter of 2010 was historically strong but a disappointing deceleration from fourth-quarter 2009.
For the first time in two years, a CMBS securities offering backed by multiple loans was priced in early April. Still, CMBS delinquency rates rose in April to a record high in the history of the CMBS industry. The Moody’s/REAL Commercial Property Price Index fell slightly in February, following on the heels of three months of rising prices, and is now down 42 percent from the peak.
Housing sales were up in March, months of supply decreased, and prices strengthened for existing homes. Still, housing foreclosure filings spiked significantly in March to even higher levels than those of summer 2009.
Investment property rents and vacancy rates, reported by Property and Portfolio Research, stabilized in the first quarter of 2010 after consistent deterioration since 2008.
Other bright spots include April’s consumer confidence index, which continues March’s rebound; the increase in retail sales in March, which was the highest since September 2008; and the increase in commercial property sales volume in March.
See below for a summary of more than 60 key indicators of the economy, real estate capital markets, housing, and commercial/multifamily investment property.
ULI Real Estate Business Barometer
Summary as of May 7, 2010
The Economy
The key economic news also came in threes in April: employment growth, a slightly higher unemployment rate, and disappointing GDP growth.
April’s employment growth of 290,000 jobs was strong and higher than expected, and followed an upward revision of March’s employment growth to 230,000. Two-thirds of the growth took place in three sectors: professional and business services, the federal government due to hiring of 66,000 temporary workers for the 2010 census, and manufacturing. There was little change in wholesale, retail, information, and financial activities. The unemployment rate, which had remained at 9.7 percent in January, February, and March, edged upward to 9.9 percent, reflecting at least in part former job seekers returning to the job market; a total of 1.38 million jobs have been lost since April 2009, and 7.8 million jobs have been lost since January 2008. It will take several years of higher growth to fully recover from that level of job losses.
The advance estimate of GDP growth in the first quarter of 2010 is 3.2 percent, a disappointing deceleration from the 5.6 percent growth of 2009′s last quarter, but still a reasonably strong number. This increase primarily reflects growth in four areas: personal consumption expenditures, particularly motor vehicles; private inventory investment; exports; and nonresidential fixed investment, particularly equipment and software. The deceleration was due, in large part, to decelerations in private investment and in exports, and downturns in residential fixed investment and state and local government spending.
The Consumer Confidence Index continued its rebound in April, reaching 57.9 after falling sharply to 46.4 in February, and now sits at its highest since September 2008. March’s retail sales showed a third-straight month of improvement, and are at their highest point since September 2008. Sales of motor vehicles showed the strongest increase at 6.7 percent, followed by building materials (3.1 percent) and apparel (2.3 percent). The growth in building materials is the highest since November 2007.
Inflation, as measured by the Consumer Price Index, rose slightly with a 0.1 percent increase. Cost increases were found in energy services, used cars and trucks, food, medical care, and transportation services. These increases were largely offset by declines in energy commodities and apparel.
The S&P 500 index increased 1.6 percent in April, while year-over-year returns at the end of April stood at 38.8 percent, a welcome improvement over 2009 returns.
Overall, many economic indicators are improving or stabilizing, which paints a hopeful picture, but the millions out of work suggests how slow the pace of recovery really is.
See the economy table
Real Estate Capital Markets
Though many problems continue, real estate capital markets are showing improvement and signs of increasing stability.
For the first time in two years, a CMBS securities offering backed by multiple loans was priced in early April by RBS Commercial Funding. CMBS delinquency rates, according to Trepp LLC, rose to 8.0 percent in April, yet another month with the highest rate in the history of the CMBS industry.
Property sales volumes stood at $5.6 billion in March, up from $4.2 billion in February, according to Real Capital Analytics. Sales volume for the quarter, however, is up significantly from the same period one year ago, suggesting the continuation of a thaw. Core rather than distressed sales dominated the transactions.
The REIT sector provided a solid performance again in April, with a 6.9 percent total return for the month. Since March 2009, monthly returns have been positive in all but three months; total returns for the past year are a very healthy 68.7 percent.
After a dismal 2009, the NCREIF Property Index turned in a positive first quarter, with total returns of 0.76 percent, comprised of income of 1.66 percent offset by 0.90 percent depreciation in value; total returns for the past year are -15.3 percent. The Moody’s/REAL Commercial Property Price Index fell 2.6 percent in February, following on the heels of three months of rising prices. Values are down 25.8 percent from a year ago and down 42 percent from October 2007′s peak While prices seem to be near the bottom, these latest data suggest we might be in for a bumpy ride on the bottom for some time.
Capitalization rates remained steady at 7.81 percent in March, similar to February levels. However, cap rates have come down substantially in the office sector over the past quarter, and they are down in the apartment sector as well. Cap rates are well above the 6.39 percent of June 2007, but just slightly above the historical norm of 7.6 percent (since 2001).
See the real estate capital markets table
Capital Markets Update
Housing
Total housing starts edged up to 626,000 in March from 616,000 starts in February, providing a three-month stretch of growth. Housing starts are now 20 percent higher than in March 2009 and about 30 percent higher than April 2009. Housing starts last April sank to the lowest point since 1970. Multifamily starts fueled March’s growth with a 40 percent increase from 63,000 starts in February to 88,000 in March. Single-family starts remained about the same at 531,000.
Prices for new homes decreased in March to about January’s level after a modest rise in February and are now 4.3 percent above where they were one year ago. Prices for existing single-family homes rose 4 percent in March, according to the National Association of Realtors (NAR), and are about the same level as they were in March 2009.
The S&P/Case-Shiller Index for existing home prices continued a five-month decline in February, decreasing 0.8 percent, following on five months of increases in the middle of 2009. Still, the net result is that prices were up year-over-year for the first time since December 2006; February’s index is a modest 0.6 percent higher than 12 months earlier. (This index is reported monthly as a three-month moving average, with a two-month lag.) Prices of existing condominiums stayed about the same, according to NAR, and are 0.7 percent lower than last March. Housing affordability remains near historic highs.
Total existing single-family home sales (seasonally adjusted) increased 7 percent in March and the supply decreased to 7.7 months, approaching the historical average (since 1982) of 7.2 months’ supply. The number of new single-family homes sold increased by 27 percent in March and the supply decreased to 6.7 months, also approaching the historical average of 6.3 months’ supply (since 1970).
Foreclosure filings-default notices, scheduled auctions, and bank repossessions-increased 19 percent in March after consistent declines since September (with the exception of December). Foreclosure filings are 8 percent higher than in February 2009 and 2 percent higher than the historical peak in July 2009. Home mortgage rates (30-year fixed) were at 4.97 percent in March.
With housing sales up, month’s supply decreasing, and strengthening prices among existing homes, as well as growth in housing starts, the housing market is showing signs of a slow revival. These positive changes follow February’s lackluster performance due to unusually bad weather and come in the spring, when a bump up is always expected. It remains to be seen how much of this is sustained in the coming months. Of key importance is the impact on prices and inventory of the foreclosure spike, as well as the April 30 expiration of tax credits for home purchases.
See the housing table
Commercial/Multifamily Investment Property
Office vacancy rates stood at 19.6 percent in the first quarter of 2010, up slightly from 19.4 percent in the fourth quarter of 2009 and 200 basis points above the same quarter a year ago, according to Property & Portfolio Research (the source of all data presented in this section). Completions in the first quarter were down as a percentage of inventory, decreasing from 0.2 percent in the fourth quarter of 2009 to 0.1 percent, both quarters substantially below the historical average of 0.7 percent. The absorption of -7.5 million square feet was an improvement from the -39.0 million square feet absorbed in the same quarter a year ago. Rents remained stable and are off 7 percent from the same quarter a year ago.
Retail vacancy rates stood at 19.4 percent in the first quarter of 2010, up slightly from 19.2 percent in the fourth quarter and 320 basis points above the same quarter a year ago. Completions in the first quarter of 2010 stood at 0.1 percent of inventory, down from 0.3 percent in the previous quarter and below the 0.6 percent historical average. Rents remained stable in the first quarter and are off 7 percent from the same quarter a year ago.
Warehouse vacancy rates stood at 13.3 percent in the first quarter of 2010, up slightly from 13.1 percent in the fourth quarter and 200 basis points above the same quarter a year ago. Completions in the first quarter of 2010 stood at 0.1 percent of inventory, down from 0.2 percent in the previous quarter and below the 0.6 percent historical average. Rents fell slightly in first-quarter 2010 and are off 8.5 percent from the same quarter a year ago.
Apartment vacancy rates stood at 8.4 percent in first quarter of 2010, which was unchanged from the fourth quarter and 60 basis points above the same quarter a year ago. Completions in the first quarter of 2010 stood at 0.1 percent of inventory, down from 0.2 percent in the previous quarter and below the 0.4 percent historical average Rents remained stable in the first quarter and are off 5 percent from the same quarter a year ago.
Hotel occupancy rates (a moving 12-month average) stood at 58.5 percent in first quarter of 2010, 340 basis points below the same quarter a year ago. Completions were down slightly as a percentage of rooms, from 3.2 percent in first-quarter 2009 to 3.1 percent, but remained above the historical average of 2.3 percent. The Index of Revenue per Available Room (RevPar Index) was down 5 percent from the same quarter of 2009.