Weekly Market Insight • Recession-Proof Trend • 7/30/13

wmiIn the good ole’ days (read: early 2000s), real estate professionals couldn’t make it through a conversation, much less an entire day, without the term “green building” coming up. The chatter has subsided a bit in recent years, perhaps causing some to assume green fell by the wayside during the recession and would be slow to come back. On the contrary: Green building fared well during the downturn – in fact, record numbers of green buildings have been built and LEED certified at various levels, with the volume increasing each year. While government properties and schools have made up a big portion of those numbers (approximately 60%), private sector developments have had a respectable showing, indicating that green building is here for the long haul and just may be recession proof.

The U.S. Green Building Council will launch LEED v4, its newest version of the LEED rating system, at the Greenbuild International Conference and Expo in Philadelphia in November. Improvements are intended to make the certification process simpler while encouraging even higher levels of performance and environmental outcomes. To ensure the number of buildings going through the certification process – whether for new construction, existing building or interior designations – does not stall, a two-year transition period will bridge LEED 2009 (the current system) and LEED v4.

Understanding the changes coming with LEED v4 will ensure real estate advisors are equipped to help their clients navigate the new system. The fact is, when deciding to pursue LEED certification for a new or existing building, property developers, owners and users aren’t especially concerned with the process itself. Instead, they are focused on what level of LEED certification is appropriate for their project, as well as the costs and expected return on investment associated with each. It’s a safe bet these inquiries will increase as more green buildings come online.

Ruth N. Darby  Director of Research – SW Region  602.952.3837  rdarby@ngkf.com

To view prior Weekly Market Insight commentary, click here.

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Industrial Market Surges Forward

The strong performance of the Industrial market continued in first quarter of 2013 with a vacancy rate of 12.4%, 30 basis points down from the fourth quarter of 2012 and 110 basis points from 13.5% the first quarter of 2012. For the tenth consecutive quarter, the market recorded positive absorption with a combined 1.7 million square feet absorbed through the first quarter of 2013, a long streak not seen since the period between third quarter of 2004 to fourth quarter of 2006. Average weighted rental rates remained stable with rates at $3.68/sf triple net, the same as fourth quarter of 2012 but down slightly from the $3.74/sf triple net in the beginning of 2012. As a result of the stabilization of the industrial market, construction projects have increased dramatically to 3.9 million square feet of which over 900,000 square feet constitute speculative building.

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Atlanta Office Market Rebounds

The Atlanta office market continued with positive fundamentals in the first quarter of 2013, posting a vacancy rate of 21.8%, down 40 basis points from the previous quarter and down 130 basis points from the first quarter of 2012. This was the first time the vacancy rate had dipped below 22.0% since the third quarter of 2009. As in previous quarters, Class A product fared better than other classes, with a vacancy rate of 20.2% which was the lowest since the second quarter of 2009 when the vacancy rate was 20.0%. Significant absorption fueled the market with over 420,000 square feet of positive absorption, up from the slightly negative fourth quarter figure of negative 62,586 square feet and the positive 201,035 square feet in the first quarter of 2012. Average weighted rental rates dropped to $20.12/sf from $20.26/sf in the fourth quarter of 2012 and first quarter of 2012. 

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Weekly Market Insight :: Better Than It Looks

wmiThe first of two scheduled revisions lifted fourth quarter GDP into positive territory, but just barely, to 0.1% on a seasonally adjusted annualized basis from the originally reported negative 0.1%. The details are better than the top-line growth suggests, especially when compared with the strong 3.1% growth rate in the third quarter. Personal consumption expenditures, which account for about 70% of total GDP, rose 2.1% in the fourth quarter, up from 1.6% in the third quarter. Nonresidential fixed investment jumped 9.7%, consisting of an 11.3% increase in equipment and software spending and a 5.8% increase in nonresidential structures. Residential fixed investment (homebuilding) surged by 17.5% in the fourth quarter, building on its impressive 13.5% increase in the third quarter.

With consumers trudging along and with business spending and homebuilding advancing at a good clip, what held back overall GDP? Government shrank at an annualized rate of 6.9%, subtracting 1.4 percentage points from GDP, and inventories declined, subtracting another 1.6 percentage points. The decline in government spending was concentrated in national defense, which plunged by 22.0% as the defense department prepared for cuts mandated by the sequester.

Expect GDP to register around 2.5% in the first quarter, signaling that the economy continues to advance despite a dysfunctional federal government.

Robert Bach  National Director, Market Analytics  312.698.6754  rbach@ngkf.com

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Friday Market Insight :: Real Estate Rules

FMIThe National Council of Real Estate Investment Fiduciaries (NCREIF) held its fourth quarter conference call yesterday, presenting an array of charts, graphs and analysis indicating that commercial real estate continues to perform well as an asset class. The NCREIF Property Index, which tracks assets held in a fiduciary environment (primarily for pension funds), posted an unleveraged return of 10.5% in 2012. The index performed well over the past 10 years, returning an annual average of 8.4%. When the leverage on these properties is included, the returns jump to 16.6% in 2012 and 12.1% annually over the past 10 years. REITs have performed even better with the NAREIT Equity REIT index posting an eye-popping 19.7% return in 2012 and a 10-year average return of 11.8%.

Although the S&P 500 performed well last year, clocking a return of 16.0%, real estate, both owned and securitized, beat the 10-year returns available from both stocks and bonds.

Retail property posted the strongest return in 2012, barely ahead of apartments, despite the fact that shopping center leasing fundamentals have not improved much. This likely reflects the concentration of institutionally held Class A properties in the NCREIF database – the best assets in the strongest markets – which have done quite well despite the lag in overall market fundamentals. Industrial also did well in 2012, followed by office and hotels. In all cases, the best properties in the strongest markets beat the averages. The West led all regions last year followed by the South, Midwest and East, although data presented by Bob White, president of Real Capital Analytics, showed a remarkable one-year increase of 25% for his firm’s Manhattan price index.

Looking ahead, listeners on the call were asked when they thought the NPI Price Index would return to its pre-recession peak, and the most popular response was 2015 – a vote of confidence in the sustained recovery of leasing markets and the potential for continued, modest tightening in cap rates.

Have a great weekend.

Best regard,

Robert Bach  National Director, Market Analytics  312.698.6754  rbach@ngkf.com

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Weekly Market Insight :: The Goldilocks Zone

wmiThe Institute for Supply Management’s manufacturing report released last week and the non-manufacturing report released this week show that the economy is on stable footing. The two ISM reports are valuable for their timeliness, released on the first and third business days of each month. They are based on surveys of purchasing managers during the prior month with the majority of responses submitted late in the month, making them a more current gauge of conditions than most government indicators.

The manufacturing index jumped to 53.1 in January from 50.2 in December while the non-manufacturing index slipped to 55.2 from 55.7 in December, both above the neutral threshold of 50. The reports include multiple sub-components, and one of the most closely watched is new orders, which leads future production activity. New orders in the manufacturing sector rose to 53.3, its highest level since May. New orders for the non-manufacturing sector, on the other hand, eased to 54.4, its lowest level since April.

The employment components in the two indexes remain healthy – 54.0 for manufacturing and 57.5 for non-manufacturing, reflective of ongoing hiring activity. Taken together,
the survey results show that the economic expansion is alive and well despite the tax increases enacted at the beginning of the year and the negative 0.1% reading in fourth quarter GDP, which was triggered by a decline in public sector output, particularly defense. While the expansion continues, there is no evidence in these reports that it is about to accelerate.

For commercial real estate, these reports suggest that the factors contributing
to its popularity with investors remain in place – growth that is strong enough
to fill empty space but not so strong as to trigger inflation, higher interest
rates or a wave of new supply… just right, in other words.

Robert Bach  National Director, Market Analytics  312.698.6754  rbach@ngkf.com

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Good News Friday :: Better Than We Thought

gnfEmployers added 157,000 net new payroll jobs in January including 166,000 private sector jobs and a loss of 9,000 government jobs. But the real headline is that the Labor Department’s annual benchmarking process revealed that the labor market did better than we thought last year. The benchmarking process is done every year at this time; the Labor Department revises its monthly estimates of employment based on unemployment insurance tax reports, which nearly all employers are required to file with their state workforce agencies.

Instead of the originally reported gain of 1,835,000 new jobs, employers added 2,170,000. Of the 335,000 additional jobs, 150,000 were added during the fourth quarter, indicating that the economy had more momentum despite the contentious debates leading up to the fiscal cliff. Data from 2011 also were revised upward from 1,840,000 to 2,103,000. Previous data showed the labor market recovering 54% of the jobs lost to the Great Recession through December while the revised data show a slightly better recovery rate of 63% through January. The monthly average last year was 181,000 net new jobs compared with the 153,000 originally reported. The unemployment rate rose slightly in January to 7.9% from 7.8% in December due to an updated population model (the denominator in the formula).

More good news: The Institute for Supply Management’s manufacturing index rose to 53.1 in January from 50.2 in December. The ISM noted that its major component indexes — new orders, production, employment, supplier deliveries and inventories — all registered above the break-even level of 50.

Taken together, this morning’s reports from the Labor Department and the Institute for Supply Management indicate that the economy is doing better than the disappointing GDP and consumer confidence reports released earlier in the week would suggest. The growth in the labor market is especially good news for commercial real estate given the close ties between job growth and demand for office and retail space as well as apartment rentals.

Have a great weekend.

Best regards,

Robert Bach  National Director, Market Analytics  312.698.6754  rbach@ngkf.com

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