Commercial Real Estate on the Move

ULI: Consensus of Economists Sees Promising CRE Outlook Through 2014

CMBS, Investment Transaction Volume Likely To Jump Sharply As Economy Gains Steam

By Randyl Drummer

March 28, 2012

Even among the stream of positive real estate surveys and forecasts recently, the one issued this week by the Urban Land Institute (ULI) stands out. Expressing the consensus views of 38 leading real estate economists and analysts from across the U.S., ULI reported commercial real estate market conditions and the overall economy is expected to see broad improvement over at least the next two years as the recovery cycle kicks into overdrive and shifts into growth mode.

In other key highlights. the ULI forecast expects CRE transaction volume to increase by nearly 50% over the next three years, while issuance of commercial mortgage-backed securities (CMBS) is expected to more than double. Institutional real estate and real estate investment trusts (REITs) are expected to provide returns ranging from 8.5% to 11% annually through 2014.

Hans Nordby, managing director, and Shaw Lupton, senior real estate economist, for CoStar Group's forecasting and analytics company, Property and Portfolio Research (PPR), were among those consulted on the forecast, which generally dovetail with PPR's baseline forecast for the recovering market over the next three years.

The general theme during a ULI webinar presenting the findings on Wednesday was one of growing confidence that, as ULI Chief Executive Officer Patrick L. Phillips put it, "The U.S. real estate economy has weathered the brunt of the recent financial storm and is poised for significant improvement over the next three years. These results hold much promise for the real estate industry."

According to the consensus, vacancy rates are expected to drop in a range of between 1.2 and 3.7 percentage points for office, retail, and industrial properties and remain stable at low levels for apartments, with rising occupancy also expected for hotels. Rents are expected to increase across the board this year at rates ranging from 0.8% for retail up to 5% for apartments.

On the residential side, housing starts are projected to nearly double by 2014, and home prices will begin to rise in 2013, with prices increasing by 3.5% in 2014.

Although the findings came with a message of caution that geopolitical and global economic events could alter the forecasted growth trajectory, the strong projections are based on a promising outlook for the U.S. economy, with surveyed economists expecting real gross domestic product (GDP) to rise steadily from 2.5% this year to 3.2% in 2014, and unemployment falling to 6.9% by 2014. The heating economy will likely lead to higher inflation and interest rates, raising the cost of borrowing for consumers and investors, however.

ULI conducted the survey, a consensus view that reflects the median forecast for 26 economic indicators, in late February and early March. Comparisons are made on a year-over-year basis from 2009 during the recession through 2014.


U.S. Retail Sales Rose in Feb. by Most in 5 Mos.

By Shobhana Chandra - Mar 13, 2012 3:23 PM CT

Americans heartened by an improving labor market boosted spending at stores and malls by the most in five months, adding to signs that the world’s largest economy is gaining strength.

The 1.1 percent advance followed a 0.6 percent increase in January that was larger than previously estimated, according to Commerce Department data issued today in Washington. Sales rose in 11 of 13 categories, including auto dealers and clothing stores, showing gains in demand were broad based.

Stocks and bond yields rose as the report indicated that the best six-month streak of employment growth since 2006 is bolstering spending even as gasoline costs rise. Job gains have not been large enough to satisfy Federal Reserve officials, who today reaffirmed a commitment to keep interest rates low.

Consumers are “unfazed by higher gas prices,” said Jonathan Basile, an economist at Credit Suisse in New York, who correctly forecast the increase in spending. “This is a pleasant surprise on the overall picture for the economy. For the Fed, it’s steady as she goes. They will be encouraged, but there is still a long way to go.”

The Standard & Poor’s 500 Index (SXP) climbed 1.8 percent to 1,395.96 at the 4 p.m. close in New York. The yield on the 10- year Treasury note increased to 2.13 percent from 2.03 percent late yesterday.

The gain in sales last month matched the median forecast in a Bloomberg News survey of economists. Estimates ranged from gains of 0.5 percent to 2.1 percent. The Commerce Department revised the January increase from a previously reported 0.4 percent advance.

Gap, Target

Sales at chains like Gap Inc. (GPS) and Target Corp. (TGT) last month beat analysts’ estimates. Williams-Sonoma Inc., the biggest U.S. gourmet-cookware chain, said demand improved at the start of the year following the holiday shopping season.

“Post holiday, we saw a progressively stronger retail environment,” Laura Alber, chief executive officer of the San Francisco-based company, said on a March 8 conference call. The company reported record earnings for 2011.

Sales increased 1.6 percent at automobile dealers, reversing the prior month’s drop, today’s report showed. The results fell short of industry figures that showed an even bigger gain.

Cars last month sold at the fastest pace in four years, led by Chrysler Group LLC and a surprise gain from General Motors Co. (GM) Light-vehicle sales accelerated 6.4 percent from January to a 15 (SAARTOTL) million annual rate, the strongest since February 2008, according to Ward’s Automotive Group.

‘Pent-Up Demand’

“There are a number of factors that are helping release this pent-up demand,” Don Johnson, vice president of GM’s U.S. sales, said on a March 1 conference call with analysts. “They include stronger employment, good credit availability, and both of those are leading to improving consumer sentiment.”

Automobile stockpiles jumped by the most in more than a year in January, leading a 0.7 percent increase in business inventories, the Commerce Department said in a separate report today.

Retail sales excluding autos increased 0.9 percent in February, exceeding the median forecast of economists surveyed that called for a 0.7 percent gain.

The sales data, which aren’t adjusted for inflation, reflected a 3.3 percent jump in receipts at service stations, the biggest gain in almost a year, as gasoline costs climbed. Regular (3AGSREG) fuel in February averaged $3.56 a gallon, or 18 cents more than January, according to AAA, the nation’s biggest auto organization. It advanced further this month, reaching $3.81 on March 12, the highest since May.

Clothing Stores

Purchases at clothing stores rose 1.8 percent, the most since November 2010. Furniture and general merchandise stores were the only categories to show a decrease in demand.

Employment and income gains are giving consumers the confidence to spend more. The Bloomberg Consumer Comfort Index rose to an almost four-year high in the week ended March 4.

Employers boosted payrolls more than forecast in February. The 227,000 increase followed a revised 284,000 gain in January that was bigger than first estimated, the Labor Department reported on March 9. The jobless rate held at a three-year low of 8.3 percent.

Job openings were little changed in January, capping the best back-to-back months since mid 2008, a signal businesses remain confident about the economic expansion, other figures from the Labor Department showed today. The number of positions waiting to be filled totaled 3.46 million, down from a revised 3.54 million in December that was higher than previously estimated.

Pay Increases

Worker pay jumped in the last six months of 2011 by the most in almost five years, helping households squirrel away some extra cash. Americans saved 4.5 percent of their after-tax income in the fourth quarter, up from a prior estimate of 3.7 percent, according to Commerce Department data.

Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York and a former Fed researcher who specialized in consumer spending, projects Americans will boost purchases at a 3 percent annual rate in the second half of the year after a 2.5 percent gain in the first six months.

Investors have driven up retailers’ shares as the job market heals. The Standard & Poor’s Supercomposite Retailing Index, which includes Gap and Macy’s Inc., has climbed 15 percent this year through yesterday.

GDP Calculation

Excluding autos, gasoline and building materials, which are the figures used to calculate gross domestic product, retail sales rose 0.5 percent in February after a 1 percent increase in the previous month.

Fed policy makers reiterated a plan to keep interest rates low at least through late 2014 after meeting today. Chairman Ben S. Bernanke, in his semiannual monetary policy report to Congress, said maintaining monetary stimulus is warranted even with employment gains and a lower jobless rate.

While there are “some positive developments in the labor market,” Bernanke told lawmakers on March 1, “the pace of expansion has been uneven.” The rise in gasoline prices “is likely to push up inflation temporarily while reducing consumers’ purchasing power,” he said.