Archives for June 2014

Despite GDP growth stalling in Q1 due to the Polar Vortex, slower inventory accumulation and mildly lower exports, the economic recovery remains intact. The anemic performance of the US economy from January through March was aberrant, and the incoming employment, manufacturing and consumer spending data all point to an economic pickup. GDP growth the rest of the year should average 3%, with growth in Q2 closer to 3.25% as the economy rebounds from the harsh winter. In addition, reduced fiscal drag from DC, increased hiring and spending by state and local governments, and increased corporate spending on plant and equipment suggest we are finally entering a period of faster growth.
That said, economically all is not well. Wage growth remains anemic and while the unemployment rate is 6.3%, down from 10%, the fall is largely due to a decline in the labor force participation rate. The ranks of the long-term unemployed remain elevated, along with the number of those working part-time because they can’t find full time work. Add to that average overtime hours that are remarkably high and termination rates that are very low and what you have are employers very reluctant to hire. This situation cannot persist, and of late job creation numbers have been on the upswing. Therefore, net job creation will rise from 200,000/month, where it has been for the past year, to 220,000 or 225,000 by year end and unemployment will probably fall to 6.1%. I expect wage growth to start picking up steam in 2015.
The biggest drag on the 2014 economy is housing. After a promising first half of 2013, the housing market is, at best, flat. While rising interest rates and home prices, a lack of inventory and lots, shortages of materials and labor, and a lack of credit and first-time buyers play a part, weak household formation is the main culprit. After averaging over 1.2 million in the years prior to the Great Recession, household formations have been averaging 500,000 since the end of the recession. The good news – household formation will rise now that all eight million jobs lost during the recession have been finally made up. We are no longer making up lost ground. Because of this, new single-family construction activity in 2014 will reach 700,000, with multifamily adding 350,000, while existing home sales should be down slightly from last year.
As for inflation, it’s benign. No matter how measured, there is no inflation to speak of in the US. Commodity prices will remain well-behaved given weak demand due to economic slowing in China and weak growth in Europe and the developing nations. Absent some sort of geopolitical crisis, energy prices will remain where they are thanks to record US oil production. As a result, expect tapering to end in November and for the Federal Reserve to begin raising short-term interest rates by mid-2015. However, long-term rates have bottomed and 10-yr Treasuries will end the year at about 3% as the 2014 economy steadily strengthens.
In short, the 2014 economy is improving and Q1 was a speed bump. Long term rates will rise, short-term rates will remain unchanged, and housing will limp into 2015, with prices rising slightly. Most critically, household formation will strengthen and corporate, state and local government spending will rise. Lastly, the likelihood of a recession during the next six months is virtually zero.
Have a wonderful summer and see you in August! (Remember, I will not be writing an article in July).
By: Elliot Eisenberg, Ph.D (GraphsandLaughs, LLC)
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Commercial fundamentals continued to strengthen in REALTOR® markets, as rental rates increased and demand for space accelerated during the first quarter. Commercial leasing rose 5.0 percent over the fourth quarter 2013, following a moderate 0.4 percent rise the prior quarter. On the supply side, new construction showed a similar acceleration, gaining 4.0 percent in the first quarter 2014, on the heels of a 2.0 percent increase last quarter.

Vacancies declined for all property types, except multifamily buildings. Office vacancies declined 90 basis points, to 16.7 percent, while industrial availability declined 150 basis points, to 13.1 percent. Multifamily vacancy reached 7.4 percent, an 80 basis point advance. Retail availability declined 190 basis points to 14.2 percent. REALTORS® expect inventory availability to remain flat over the next 12 months.

With decreasing vacancies, landlords were in a stronger position, and provided fewer rent concessions. Rent concessions declined 4.0 percent on a quarterly basis. The national average tenant improvement allowance was $4,878 per lease in the first quarter 2014.

2014.Q1 Vacancy Rates
Office	16.7%
Industrial	13.1%
Retail	14.2%
Multifamily	7.4%
Hotel	18.6%

Average rental rates rose 2.0 percent during the first quarter, following a 0.3 gain percent during the fourth quarter 2013. In terms of space requirements, tenant demand in the 5,000 square feet and below category accounted for 75.0 percent of leased properties. At a more granular level, demand for space under 2,500 feet comprised 42.0 percent of lease agreements. Lease terms remained steady, with 36-month and 60-month leases capturing 62.0 percent of the market.

Note: Vacancy rate data in this report comes from a national survey of REALTORS® who identify themselves as commercial practitioners. The data does not match the historical data used to generate NAR’s Commercial Real Estate Outlook, which is sourced from Reis, Inc.

By: George Ratiu, Economist Commentaries

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Despite disappointing economic performance and severe winter weather in parts of the country, commercial REALTORS® reported broad-based market improvements in the first quarter 2014. In keeping with the upward momentum in the markets, REALTORS® rated the direction of commercial business opportunities 6.0 percent higher in the first quarter 2014, an improvement over the 5.0 percent rise from the fourth quarter 2013.
On a year-over-year basis, sales increased 11 percent in the first quarter, as prices rose 4 percent. Cap rates continued compressing with a 50 basis point decline, from an average of 8.7 percent in the fourth quarter 2013 to 8.2 percent in the first of this year. Multifamily properties recorded the lowest average cap rates, at 7.7 percent, followed by hotels, at 7.6 percent. Office and retail spaces posted identical cap rates of 8.0 percent, while industrial properties recorded capitalization rates of 8.1 percent.
The average transaction price moved from $1.2 million in the fourth quarter 2013 to $1.4 million in the first quarter 2014. In a noticeable change, commercial REALTORS® reported that the most significant concern during the first quarter was a shortage of available inventory. The second major concern was the pricing gap between buyers and sellers. After several years of topping the list of concerns, financing dropped to a distant third place, signaling a marked shift in market conditions over the past six months.
By: George Ratiu (National Association of REALTORS®)
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Apartment rents will grow faster in many secondary markets than in the top primary markets like New York City and Los Angeles, according to 2014 projections from data firms Reis Inc. and Pierce Eislen.

“There has been a tremendous amount of rent growth and growth in value in these markets,” says Robert Kadoori, senior vice president for debt and structured finance with CBRE capital markets, which quoted the Pierce Eislen projections in a recent multifamily presentation.

Apartment investors have been turning toward secondary markets this year as they look for higher yields on their investments. Rising rents will make those markets even more attractive.

In 2014, the top 10 metro areas for multifamily rent growth will not include New York City, Los Angeles, Boston or Chicago, according to projections from Reis, a New York City-based research firm. Instead, rents are set to grow more quickly in several secondary markets. Denver, Colo.,  Dallas, Houston and Austin, Texas, and Nashville, Tenn. are all poised to grow their average rents by more than 4 percent in 2014, according to Reis. These secondary markets all have local economies dependent on quickly growing industries. “The tech and energy markets are very prevalent here,” says Brad Doremus, senior analyst with Reis.

Projections from Pierce Eislen, an affiliate of Yardi Systems Inc., spell even stronger growth for average apartment rents in markets including the Southwest Florida coast (9.3 percent); Portland, Ore., (6.0 percent) and Atlanta (6.0 percent). “Many of those economies are recovering. There seems to be a consensus that their time has come,” says CBRE’s Kadoori.

Fading appeal

Most of the famous “sexy six” apartment markets are further down the list for rent growth, if they appear at all. New York City, for example, is projected by Reis to have 4 percent rent growth this year, with a multifamily vacancy rate of just 2.5 percent, down 0.2 percent year-over-year. The projection of 4 percent rent growth is impressive, but still less than the rent growth expected in leading secondary markets. The economy of New York City is more diversified and includes a great deal of financial services firms. Apartment rents are also already high in the core apartment markets, limiting potential for big rent hikes.

Seattle and seemingly every town in the San Francisco Bay Area still top the lists for projected rent growth in 2014, likely due to the strength of the tech business in their local economies.

Multifamily investors have been paying attention to the new trends.

“We have seen quite a bit of attention turn from the big six markets,” says Kadoori. “The core investors look at the secondary markets and their rising economies and see downside protection.”

A long list of metro areas is sharing the positive attention. Some brokers refer to these towns as “NFL cities,” because metros areas prosperous enough to feature a National Football League team also seem to be large enough to share in the quickening recovery.

However, investors are still most interested in class-A properties in the top sub-markets.

“The gulf between the two ends of the market is wider than I would expect,” Kadoori notes.

By: Bendix Anderson, NuWire Investor

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