Matt Faupel, Partner with Graham4, is a member of the Urban Land Institute,
Graham4 is the only team in the region affiliated with ULI and that has the knowledge and experience with Urban Land Institute. This institute provides leadership in the responsible use of land by creating and sustaining thriving communities worldwide.
ULI provides summaries of the Real Estate Barometer. Read below for details..
ULI provides summaries of the Real Estate Barometer. Read below for details..
ULI Real Estate Business Barometer
Diverging trends appear in September's economic and housing numbers. Jobs, retail sales, and consumer confidence are still suffering, but the stock market and GDP, even after adjusting the GDP for the "cash for clunkers" impact, are showing healthy signs. Housing starts and new-home sales remain dramatically below historic averages, but existing single-family home sales are above historic averages.
Generally dismal numbers describe the real estate capital markets and investment property markets: property sales volume decreased, CMBS issuance is nonexistent, and CMBS delinquency rates increased. In addition, vacancy rates increased, rents decreased, and office absorption is still negative.
See below for a summary of more than 60 key indicators of the economy, real estate capital markets, commercial/multifamily investment property, and housing.
ULI Real Estate Business Barometer
Summary as of October 30, 2009
The Economy
September presents a picture of diverging economic indicators, with jobs, retail sales, and consumer confidence still suffering but the stock market and the GDP reflecting some healthy activity. The 263,000 jobs lost in September is up from the 201,000 jobs lost in August. While the declines witnessed in these two months are still the smallest monthly declines since September 2008, the fact that losses rose over the previous month indicates continuing instability in the job market. Since September 2008, 5.8 million jobs have been lost and the unemployment rate rose to 9.8 percent in September 2009.
The Consumer Confidence Index fell to 47.7, well below the 53.1 number recorded in August. Retail sales were down 1.5 percent, following the end of the "cash for clunkers" program that had fueled retail sales growth in August; in August, motor vehicle sales increased almost 8 percent, but in September, motor vehicle sales decreased by more than 10 percent. Still, almost all other retail categories experienced some very slight growth in sales, although all of them less than 1 percent. Inflation, as measured by the Consumer Price Index, rose 0.2 percent after increasing 0.4 percent in August, with the September rise mainly attributable to energy costs and the increase in costs of used vehicles (yet another impact of the "cash for clunkers" program). Despite the rise in energy costs, the gasoline price and fuel oil indices remain about 30 percent lower than one year ago.
The best news of late, of course, was that the third-quarter GDP increased by an annualized rate of 3.5 percent from the second quarter, a strong growth rate that has not been seen since 2007. Still about one-third of this growth is due to motor vehicle sales, again related to the "cash for clunkers" program during this quarter; absent this program, GDP may have been in the mid-2 percent range—still higher than we have seen since the end of 2007. The S&P 500 stock index continued to show healthy gains, with a 3.7 percent rise in September.
Real Estate Capital Markets
Real estate capital markets remain in poor condition, with limited bright spots.
The REIT sector continued to show strong returns in September, the third straight month of solid returns; still, total returns for the past year are –28.4 percent. After dismal first and second quarters, the NCREIF Property Index turned in only a slightly better third quarter, with total returns of –3.3 percent, primarily attributable to continued depreciation; total returns for the past year are –22.1 percent.
CMBS issuance in September was nonexistent, as it was from July 2008 to this past May and then again in August, according to Commercial Mortgage Alert. (Issuance activity this past June and July was minuscule compared with that of recent years.) CMBS delinquency rates, according to Trepp LLC, were 4.36 percent, up from 4.03 percent in August.
Commercial mortgage rate spreads over ten-year Treasuries, tracked by Cushman Wakefield Sonnenblick Goldman, remain relatively high as of the beginning of October, with spreads remaining the same for all sectors except multifamily and multitenant industrial, which showed decreases.
Property sales volumes fell in September, according to Real Capital Analytics; the sales volume stood at $4 billion, down from $4.3 billion in August and well below the $10.6 billion seen in September 2008. Capitalization rates fell slightly in September, from 7.81 percent to 7.74 percent, but are up from 6.84 percent in September 2008. Cap rates are now very close to the historic norm of 7.59 percent (since 2001).
For additional commentary on real estate capital markets, see ULI senior fellow Steve Blank's Capital Markets Update.
Housing
Total housing starts inched up a bit, standing at 590,000 in September. Very slight shifts up and down have characterized housing starts since July, after substantial increases in May and June. In April, total housing starts had reached the lowest point since 1970. Single-family starts, at 501,000, drove activity in September, climbing from 482,000 in August. Multifamily starts declined to 78,000 in September from 102,000 in August. Multifamily starts in September were 69 percent lower than a year earlier, while single-family starts were 8.7 percent lower.
Prices for new homes increased slightly in September and are 9 percent lower than a year earlier. Prices for existing single-family homes decreased very slightly from August, according to data from the National Association of Realtors (NAR), and are 8 percent lower than in September 2008. The S&P/Case-Shiller Index for existing homes increased very slightly in August, only the fourth increase in 38 months, but, notably, these four increases have been consecutive starting in May. (This index is reported monthly as a three-month moving average, with a two-month lag.) Prices of existing condominiums decreased slightly, according to NAR, and are almost 12 percent lower than last September. Housing affordability remains near historic highs.
Total existing single-family home sales increased in September for the sixth straight month, a welcome positive sign, and the total inventory of homes for sale decreased, bringing the supply down to 7.6 months, within range of the historic average (since 1982) of 7.2 months' supply. The number of new single-family homes sold decreased in September, a change from the growth pattern of the previous five months, but the inventory of new homes for sale declined so the supply remained at 7.5 months, above the historic average of 6.3 months' supply (since 1970).
Home mortgage rates (30-year fixed) remained fairly stable in August at 5.06 percent, and remain very favorable by historic standards. Foreclosure filings—default notices, scheduled auctions, and bank repossessions—declined in September, for the second straight month, after reaching a four-year peak in July. Foreclosure filings are 29 percent higher than in September 2008.
These housing trends in total suggest continued movement in the right direction, but a healthy and balanced housing market is still not in view.
Commercial/Multifamily Investment Property
Office vacancy rates stood at 19.4 percent in the third quarter of 2009, up from 18.6 percent in the second quarter and 340 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 third quarter of 2009 were stable as a percentage of inventory, remaining at 0.3 percent, but below the 0.7 percent historic average. The absorption of -34.5 million square feet was just slightly better than the -39.4 million square feet absorbed in the second quarter of 2009. Rents fell in the third quarter of 2009 and are off 8.7 percent from the same quarter a year ago.
Retail vacancy rates stood at 18.6 percent in the third quarter of 2009, up from 17.5 percent in the second quarter and 570 basis points above the same quarter a year ago. Completions in the third quarter of 2009 stood at 0.3 percent of inventory, up from 0.2 percent in the previous quarter but below the 0.6 percent historic average. Rents fell again in the third quarter of 2009 and are off 8.2 percent from the same quarter a year ago.
Warehouse vacancy rates stood at 13 percent in third-quarter 2009, up from 12.2 percent in the second quarter and 320 basis points above the same quarter a year ago. Completions declined as a percentage of inventory, from 0.3 percent in second- quarter 2009 to 0.2 percent in third-quarter 2009, both below the 0.6 percent historic average. Rents fell again in third-quarter 2009 and are off 8.9 percent from the same quarter a year ago.
Apartment vacancy rates stood at 8.4 percent in third-quarter 2009, up from 8.2 percent in the second quarter and 190 basis points above the same quarter a year ago. Completions as a percentage of inventory remained the same as second-quarter 2009 at 0.2 percent, below the 0.4 percent historic average. Rents fell slightly in third-quarter 2009 and are off 5.8 percent from the same quarter a year ago.
Hotel occupancy rates (a moving 12-month average) stood at 58.7 percent in third-quarter 2009, down from 60 percent in the first quarter of 2009 and 680 basis points below the same quarter a year ago. Completions were up slightly as a percentage of rooms, from 2.6 percent in third-quarter 2008 to 3.2 percent. Revenue per available room (RevPAR) fell in the third quarter of 2009 compared to the same quarter a year ago, off by 23.1 percent.
For additional information, contact Matt Faupel, Graham4, 307.690.0204.
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