Real Estate Compass – May 2012 Issue # 9
The top trends in this month’s Compass highlight a lukewarm economy, uneven signals in the capital market, and a housing market with little interest in busting forth. Compared with a year ago, however, 76 percent of the key indicators in the Compass are better and 24 percent are worst. Most of the news in the economy was a letdown. Among the top trends is again a disappointing employment growth in April a slowing first quarter GDP growth, which in now below its 40-year quarterly average. 12-month S&P returns were at half their long-term average; consumer confidence remained almost flat. The only bright news was the renewed strength of retail sales.
Employment growth in March was disappointing with only 115,000 versus the 220,000 of February, month which went on for three straight months constituting the fourth-straight month in which job growth exceeded the historical average monthly growth since 1970.
This meager growth rate is again due to 15,000 job losses in the public sector job market. At April’s growth rate, it would take over three and a half years to regain the 5 million jobs lost in the past four years.
Private sector job gains in April occurred in food services, professional and technical services, temporary help service, durable goods manufacturing and wholesale trade. The overall unemployment receded to 8.1 percent in April, the lowest in over three years.
The advance estimate of first-quarter 2012 GDP growth is 2.2 percent, down from the fourth quarter 2011 rate of 3.0 percent (the highest growth rate in six quarters).
The Consumer Confidence Index barely changed, drifting to 69.2 in April from 69.5 in March. Just to compare, in January 2008, this index was at the 87.3 level,
Total retail sales in March were up a strong 0.8 percent, slightly below February’s strong 1.1 percent. This was the result of growth in building materials, motor vehicles and price increases in gasoline. Retail sales of $411.07 billion are 6.5 percent higher than one year ago and exceed the pre-recession peak of $378.4 billion in November 2007.
Inflation, as measured by the Consumer Price Index, was 0.3 percent in March, due to increases in fuel oil, gasoline, and used vehicles. For the past 12 months, the CPI has risen 2.7 percent.
The value of private construction edged up in March after two moths of slight decline. Public construction put in place decreased in March for the fourth straight month.
Real Estate Capital Markets
Real estate capital market indicators were basically unchanged in this month’s Compass. Prices for investment-grade property, as indicated by repeat sales indices and estimates of REIT portfolio market values, barely moved up. Similarly, repeat sales indices for grade property shown an almost imperceptible shift in prices.
Capitalization rates, as reported by Real Capital Analytics, compressed slightly from 7.06 percent in February to 6.97 in March. As reported by NCREIF, capitalization rates fell from 6.03 percent in the fourth quarter of 2011 to 5.97 percent in the first quarter of 2012. First-quarter cap rates are closed to their lowest level since the third quarter of 2008.
Commercial property sales volumes, excluding land and hotels, jumped 15 percent to $21.2 billion in March. The month’s sales volume was amongst the four highest in the past four years and follow a two-year low in February. The highest sector was the retail sector with 40 percent of the transaction volume.
The GSA Commercial Property Price Index, based on estimates of private market values for REIT portfolios, increased 0.1 percent in April. Over the past 11 months, the GSA Price Index has shown little movement, increasing only 1.0 percent.
The most active sales markets in the past 12 months accounted for 42 percent of all transactions and included the following cities: Manhattan, Los Angeles, Chicago, Boston, Dallas, San Francisco, Atlanta and Washington, D.C.
Returns in the REIT sector were down but still strong at 2.7 percent in April. Total returns for the month by property sector range from -0.3 percent for the industrial sector –to 4.3 percent for the retail sector.
Bank real estate loan delinquency rates continued to fall in the fourth quarter. Commercial and multifamily mortgage delinquency rates are now 3.76 percent and 2.53 percent, respectively. Construction and development loans have the highest delinquency rate at 13.44 percent.
Multifamily monthly permit and start activity is at or near highs not seen in well over three years. Although monthly single family permits and starts were at a 22-month high, both permits and starts remain near historical lows. Sales of existing single family homes decreased 2.5 percent in March to 3.97 million.
The prices of existing homes moved down 0.8 percent in February, the sixth-straight month of decline, bringing it to 35 percent below its peak in July 2006 and the lowest level since them.
Sales of new single family homes, already near their lowest level since 1963, slid further and prices declined. The 7.1 percent March decline erased the 7.3 percent gain of the previous month. Despite similar fluctuations over the past year, sales are up 7.5 percent over March 2011. Sales are now 76 percent below the pre-recession high in July 2005.
Sales of existing new single family homes also fell, though they remained above their historical average. The number of these units decreased 2.5 percent in March to 3.9 million, the second month of sales decline. This was disappointing as sales had jumped to a 20-month high in January. Inventory was close to flat in March and supply rose to 6.3 months, still 16 percent below the long term average.
Median prices for new single-family homes fell by 1 percent in March to $234,500 after a dramatic jump of 8.7 percent in February. Even with similar vacillations over the past year, prices are up 6 percent over March 2011.
Multifamily building permits were strong in March, with an almost 9 percent increase to a 41 month high of 228,000. Multifamily housing starts increase 4 percent in March to 196,000, their second highest monthly level in 40 month. Existing condo sales fell almost 9 percent to 510,000, the same as in March 2011.
Home mortgage rates (30-year fixed) fell in April to 3.91 percent from 3.95 percent in March, the second 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).
Office vacancy rates stood at 16.0 percent in the fourth quarter of 2011, down slightly from 16.2 percent in the third quarter and 50 basis points below the figure for the same period one year earlier, according to CBRE
Office rents continued a slow climb in the fourth quarter of 2011. Apartment rents have increased for seven straight quarters and are now above their pre-recession peak. Industrial and retail rents continue to decline, although the pace is slowing.
Office vacancy and industrial availability rates continued their slow six quarter descent, while retail availability stayed at its highest level on record (since 1989) for the third-straight quarter and apartment vacancies inched up from their post-recession low.
Industrial availability rates stood at 13.6 percent in the fourth quarter of 2011, continuing their slow but consistent six-quarter decline; rates are now down 70 basis points from the same quarter a year earlier. Net absorption was strong at 27.6 million square feet, although down from the previous quarter, and completions were up.
Hotel revenue per available room (RevPAR) increased from the same quarter in the previous year. Hotel occupancy rates stood at 55.5 percent in the fourth quarter of 2011, up from 53.4 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.
On average, April was very little different form March, which was itself a mixed month. Needless to say, the expectations of the much welcome recovery have been dashed by now. Unemployment figures continues to disappoint. By now many people have concluded that prices have reached a floor and will not drop much further. In fact, in some regions prices have begun to climb. This is the case with the South of Florida and particularly with Miami where the luxury condominium sector’s prices are ticking up with singular strength. New construction, now in place, is vibrant in areas such as Sunny Isles, Brickell, Coconut Grove and Key Biscayne, to site some examples. This has led us to conclude that, in so far as the real estate market is concerned, evolving confidence will manifest not as a wide based movement, but it will be focused and regionally specific.
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