Written by George Ratiu
Director, Quantitative & Commercial Research
Published by the National Association of Realtors
While we are still grappling with the delays from October’s government shutdown, the estimates for third quarter economic output show much of the same. Gross domestic product rose at an annual rate of 2.9 percent in the third quarter, on the heels of a 2.5 percent rise in the second quarter. While the acceleration in the economic pace is welcome, most of it was boosted by inventory adjustment.
All main GDP components—consumers, businesses, government and trade—were positive contributors to third quarter growth. Consumer spending gained 1.5 percent, driven by a 4.3 percent rise in consumption of goods. As the period benefited from summer season activities—including travel and home shopping—consumers boosted their spending on durable goods, including cars (up 6.6 percent), furniture and home furnishings (up 12.0 percent), and recreational vehicles and goods (up 11.5 percent). In keeping with the summer trends, consumers also spent more on food and beverages, up 2.7 percent. Consumer
spending on services rose a more modest 0.1 percent, as transportation and recreation increased.
Meanwhile, businesses approached investments with a cautious outlook in the third quarter, as the specter of budget wrangling in Washington and the possibility of a government shutdown loomed large. Nonresidential fixed investments rose at an annual rate of 1.6 percent. In a positive development, business spending on buildings jumped 12.3 percent in the third quarter, on the heels of a 17.6 percent gain during the second quarter. The noticeable advances point to a strengthening pipeline of commercial developments, as market fundamentals continue to improve.
Business investments in intellectual property products—a new category introduced by BEA last quarter, which comprises software, R&D, entertainment, and literature—increased 2.2 percent in the third quarter, mostly boosted by investments in software products and R&D.
Businesses cut back on their equipment spending, which made the bulk of investments over the past three years. Business spending on information processing declined 3.9 percent, while spending on transportation equipment decreased 4.1 percent, respectively. Spending on industrial equipment roseat an annual rate of 17.5 percent during the third quarter.
The past few quarters have witnessed a broad slowdown in global economies’ rates of growth. Against this trend, the U.S. economy posted a positive trade balance in the third quarter. Exports increased 4.6 percent, while imports rose 1.9 percent, leading to a trade surplus of $44.8 billion for the period. The increase in international trade provides for continued strengthening in industrial sector fundamentals, with warehouses seeing marked results.
Government spending posted a modest increase in the third quarter, as spending at state and local government levels rose after years of cutbacks. With stronger balance sheets, state and local governments increased their spending by an annual rate of 1.5 percent. Federal government spending continued declining, as the process of “sequestration” marched on, posting a 1.7 percent slide in the third quarter.
The economic picture of the third quarter highlighted several other moderately positive sections. Existing home sales rose 13.0 percent during the period, accompanied by a 12.8 percent rise in median prices. The Institute for Supply Management indexes for manufacturing and services advanced at a 2.0 percent rate. Consumer confidence climbed 24.6 percent in the third quarter, as employment remained positive.
Payroll employment grew by a net 490,000 jobs during the 3-month period, as the service firms added 422,000 new jobs. The professional and business services industry was one of the main drivers of growth, with 109,000 jobs, followed by retail trade with 101,600 new jobs. Education and health accounted for 79,000 new jobs, with leisure and hospitality adding another 59,000. The October data showed employment growth maintaining momentum, as employers added 204,000 new jobs. The unemployment rate declined from 7.6 percent in the second quarter to 7.3 percent in the third quarter.
However, the outlook for the last quarter of 2013 does not bear much glee. With the knowledge of the government shutdown in the rearview mirror, and a retail season already eyeing steep discounts, the GDP outlook for all of 2013 projects an annual growth rate of only 1.7 percent.
Commercial Real Estate
Sales of major properties (over $2.5M) advanced 26 percent on a yearly basis during the third quarter of this year, totaling $89.7 billion, based on Real Capital Analytics (RCA) data. Several property types attracted stellar investor interest, registering double- or triple-digit growth rates. Sales of retail assets rose 104 percent from the same period in 2012, while industrial sales volume advanced 70 percent. Based on National Association of REALTORS® data, sales of properties at the lower end of the price range (mostly below $2.5 million) increased 11 percent on a yearly basis. Based on three quarters worth of data, total sales volume is expected to surpass 2012’s $300 billion.
Portfolio sales contributed a major portion to the total sales volume during the quarter, accounting for $30.2 billion. Blackstone was involved in two major portfolio transactions, one for apartments and the other for industrial properties, totaling over $3.1 billion. Sprint Realty Capital spent $7.7 billion on a portfolio of mixed properties. On the individual property side, office transactions dominated the market for top properties. The building at 650 Madison Avenue in New York sold for $1.3 billion in the third quarter, taking the top spot. It was followed by a couple of office properties in Los Angeles, City National Plaza and One Wilshire, which traded for $858 million and $439 million, respectively.
As demand for properties grew, prices rose 9.3 percent in the third quarter, according to RCA’s Commercial Property Price Index. Apartments continued to be the clear winners, as prices advanced 14 percent. The average apartment unit price reached $107,240. Retail properties witnessed a 12 percent price appreciation, trading for an average $170 per square foot. Prices for office buildings gained 9 percent, changing hands for an average of $233 per square foot. Industrial properties posted average prices of $65 per square foot, a 1 percent decline from a year ago.
Cap rates inched up 7 basis points, to an average 6.8 percent nationally across all property types, based on RCA data. For lower priced properties (below $2.5M), prices increased 4 percent year-over-year, based on survey data from the National Association of REALTORS®, while cap rates increased 50 basis points to an average 9.2 percent.
As asset values rose, new commercial distress continued on a downward trend. New distress in the third quarter accounted for $2.5 billion, a 30 percent decline from the same period in 2012.
To read more and view data, visit: http://www.realtor.org/reports/commercial-real-estate-outlook