Commercial Real Estate Index
SIOR Index — Commercial Markets
Move Sideways in Second Quarter
2012
Lawrence Yun is Senior Vice President and Chief
Economist at the National Association of Realtors®. He
writes regular columns on real estate market trends,
creates
NAR’s
forecasts,
and
participates
in
many
economic forecasting panels, including Blue Chip and
the Harvard University Industrial Economist Council. He
received his undergraduate degree from Purdue University
and earned his Ph.D. from the University of Maryland.
George Ratiu is Manager of Quantitative & Commercial
Research
with
the
NATIONAL
ASSOCIATION
OF
REALTORS® in Washington, D.C. His research focuses
on macroeconomic indicators, commercial real estate, and
international investments. He writes regular columns for
Commercial Property Executive and Real Estate Insights,
and produces NAR’s Commercial Real Estate Outlook, which
provides quarterly forecasts for the office, industrial, retail and
multi-family sectors. He also manages the NAR Commercial
Real Estate Quarterly Market Survey. He earned his graduate
degree in Economics from Western Kentucky University.
NAR Economic Overview
Heading into the third quarter of 2012, the economy seems to have gone on vacation. The pace of economic activity slowed noticeably in the second quarter and
most indicators point to an environment of suspended expectations. The presidential
election and legislative issues on the horizon are weighing heavily on the minds of
market participants. Against this backdrop, the slight slowdown experienced SIOR
practitioners in office and industrial markets tempers expectations.
Looking at economic activity as measured by gross domestic product (GDP), it
is obvious that fundamentals are in a slowdown. Based on the Bureau of Economic
Analysis’s second estimate, GDP increased a scant 1.5 percent in the second quarter
of this year. The anemic figure comes in the wake of a soft first quarter rise of 2.0
percent. After a recession, a healthy recovery translates into GDP growth in the 4.0to-6.0 percent range.
Both consumers and businesses moderated their spending. For consumers, weak
employment growth, stagnant wages, rising prices and low confidence collaborated
to inhibit spending. For employers, volatile financial markets, increased regulation and rising uncertainty over the outcome of the presidential election and the
2013 legislative environment outweighed record profits and cash reserves, leading
to restrained interest in expanding payrolls. Meanwhile, governments at all levels
continued to cut expenses.
Following a double-digit run-up in spending during the middle part of last year,
companies have been steadily scaling back their purchases. Business investments
increased at an annual pace of 5.4 percent in the second quarter, a small advance
compared with annual growth rates of 14.6 percent in 2010 and 10.4 percent in 2011.
Spending on equipment and software gained 7.2 percent, driven by investments in
Gross Domestic Product
6.0
4.0
2.0
-2.0
2006 - Q1
2006 - Q2
2006 - Q3
2006 - Q4
2007 - Q1
2007 - Q2
2007 - Q3
2007 - Q4
2008 - Q1
2008 - Q2
2008 - Q3
2008 - Q4
2009 - Q1
2009 - Q2
2009 - Q3
2009 - Q4
2010 - Q1
2010 - Q2
2010 - Q3
2010 - Q4
2011 - Q1
2011 - Q2
2011 - Q3
2011 - Q4
2012 - Q1
2012 - Q2
0.0
-4.0
-6.0
-8.0
-10.0
Source: Bureau of Economic Analysis
52
professional report | 3rd Quarter 2012
Employment
12
Continued
Payroll Employment (M-o-M Change, SA, Thousands)
600
400
10
200
8
0
6
-200
-400
4
-600
2
-800
-1000
2005 - Jan
2005 - Apr
2005 - Jul
2005 - Oct
2006 - Jan
2006 - Apr
2006 - Jul
2006 - Oct
2007 - Jan
2007 - Apr
2007 - Jul
2007 - Oct
2008 - Jan
2008 - Apr
2008 - Jul
2008 - Oct
2009 - Jan
2009 - Apr
2009 - Jul
2009 - Oct
2010 - Jan
2010 - Apr
2010 - Jul
2010 - Oct
2011 - Jan
2011 - Apr
2011 - Jul
2011 - Oct
2012 - Jan
2012 - Apr
2012 - Jul
0
Source: Bureau of Labor Statistics
SIOR Index
Northeast
Midwest
South
West
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
Source: SIOR, NAR
GDP
SIOR Index
150
6.0
4.0
100
0.0
50
-2.0
2005.Q3
2005.Q4
2006.Q1
2006.Q2
2006.Q3
2006.Q4
2007.Q1
2007.Q2
2007.Q3
2007.Q4
2008.Q1
2008.Q2
2008.Q3
2008.Q4
2009.Q1
2009.Q2
2009.Q3
2009.Q4
2010.Q1
2010.Q2
2010.Q3
2010.Q4
2011.Q1
2011.Q2
2011.Q3
2011.Q4
2012.Q1
2012.Q2
0
-4.0
-6.0
-50
-8.0
-100
Sources: SIOR, BEA
-10.0
Percentage, Annual Rate
2.0
Index Value
industrial and transportation equipment. Companies
cut back their purchases of information processing
equipment to an annual rate of 2.1 percent, from
8.7 percent a year ago. Expenditures on new commercial buildings were virtually flat at 0.9 percent.
Rather weak business activity is puzzling given the
vast amounts of cash that the companies are sitting
on.
A bright spot for business, international trade
gained during the second quarter. Both exports and
imports of consumer goods increased 6.0 percent.
Exports of services rose 3.7 percent, while imports
of services advanced 5.5 percent, leading to a negative net export figure. Industrial and warehouse
spaces will continue to be sought after as trade activity grows.
Accounting for two thirds of economic activity,
consumer spending increased a modest 1.5 percent in the second quarter. Spending on goods was
almost unchanged at an annual rate of 0.7 percent.
Consumers actively cut back their spending on durable goods, with spending on cars dropping by 10.7
percent and purchases of furnishing and appliances
declining by 1.5 percent. Consumers also slashed
their spending on food, clothing and shoes, while
upping their spending on gasoline and energy goods.
Faced with an uncertain economic environment,
consumers chose to redirect their spending to housing, health care, recreation and financial services and
insurance. The retail sector will expand very slowly,
at best.
Government spending declined 1.4 percent,
driven by budget cuts at federal, state and local levels. At the federal level, both defense and nondefense
cuts of 0.4 percent added to decreases spending.
Squeezed by lower revenues, state and local governments continued to slash spending by 2.1 percent,
the eleventh consecutive quarterly decline. On the
commercial front, some newly vacant office spaces,
previously leased or owned by the government, will
likely reach the market soon.
Lack of employment growth sits at the core of
the current economic condition. In the wake of disappointing quarterly earnings reports, several major
companies have been announcing layoffs during
the quarter. After a positive first quarter, when the
private sector added a net 711,000 payroll jobs to
the economy, the second quarter generated a meager
369,000 jobs. Government jobs fell by 40,000 during the second quarter, making it the eighth consecutive quarterly decline.
The trend was also mirrored in the figures for firsttime unemployment insurance claims. The number
of weekly claims—which had steadily declined
towards 360,000-per-week from 2011 to the first
quarter of this year—jumped to 382,000-per-week
during the second quarter. Following a similar pattern, the unemployment rate rose from 8.1 percent in
April to 8.3 percent in July.
Unemployment Rate
Commercial Real Estate Index
SIOR Index Results
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540.982.0011
After three quarters of consecutive gains, office
and industrial spaces slowed during the second
quarter. The Commercial Real Estate Index,
representing second quarter 2012 data, declined
0.3 points. The national index, based on 10
variables pertinent to the performance of U.S.
industrial and office markets, closed at 70.7. In
a split, the office sector decreased 7.7 points to
an index value of 61.9, while the industrial sector rose 4.7 points to 76.1, mirroring increases
in demand for warehouses due to larger international trade volume.
The general stagnation in national economic
conditions spilled over into commercial markets.
Geographically, the Midwest and West showed
improved conditions. The Midwest posted the
highest nominal index value during the second
quarter—74.3. Markets in the West improved
the most over the quarter, advancing 5.4 points.
The Northeast and South declined 9.4 points and
3.9 points, respectively.
With employment moderating, leasing activity took a step back, as almost two thirds of
respondents found activity below historic levels. Vacancy rates notched down slightly—51
percent of SIORs pointed to vacancies which
are lower than a year ago. Concessions remain
the norm for 78 percent of respondents. In turn,
rents flattened, as half of practitioners reported
rents in line with or slightly above long-term
averages. Subleasing availability was mostly
unchanged from the first quarter, with 23 percent of SIORs reporting ample sublease space.
In an encouraging sign, construction of
new commercial space is slowly moving
upward—35 percent of practitioners mentioned
there was new construction in their market, an
improvement from the 15 percent figure a year
ago. Development conditions continued to
strengthen—as they remain in buyers’ favor—
acquisition prices were lower than construction costs in 76 percent of the markets. A weak
national economy is acting as a drag on local
economies and markets—81 percent of SIORs
found the national economy to have a negative
impact upon their markets (compared with 69
percent in the first quarter).
Looking at the broader landscape, commercial markets are following economic trends and
treading water for the time being. SIOR members expect conditions to remain moderately
positive in the second half of 2012—59 percent
of respondents anticipate better markets in the
next three months, while 32 percent project no
change.