From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for December 2015

PWC Surveys Investors

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PriceWaterhouse Coopers does a great job with they’re quarterly survey of commercial real estate investors.  Previously known as the Korpacz Survey, after it’s founder, Peter Korpacz, the lengthy but highly readable review gives investors, brokers, appraisers, and others a snapshot of anticipated market performance both by property type (retail, office, etc.) and market (regional, and in some cases by metro area).  The most recent issue just hit my desk, and as usual it’s terrifically informative.

The headline this quarter is, “Investors Scrutinize Cash Flow Assumptions”.  As it turns out, the assumptions and resultant aggressiveness (or lack thereof) varies significantly by property type and geographic market.  For example, strip shopping centers (nationally), apartments (also nationally), and regional warehouses in the pacific and east-north-central regions are enjoying increased optimism, measured by very significant declines in overall capitalization rates.  On the other hand, 20% of investors surveyed expect regional mall cap rates to increase over the next six months, and 40% of investors felt the same about the overall Denver market.

Intriguingly, cap rates in CBDs trend lower than in the suburbs of those same cities, driven mainly by higher barriers to entry and a lack of available land downtown.  Additionally, most downtown cores in major markets provide the sort of 24/7 lifestyle and transportation alternatives that appeal to younger workers, and hence the firms that employ them.  As such, the downtown locations are viewed as less risky, overall.

Overall, vacancy rate assumptions have remained steady over the past year.  Coupled with that, tenant retention rates have also remained steady across markets.

In general, office markets remain fundamentally strong, and PWC survey respondents project falling vacancy and rising rental rates over the next few years.  Retail market conditions are improving, with no major markets currently in recession and an increasing number in expansion.  In the industrial sector, the expansion of the past few years is likely to abate, according to the survey, and a few metros may find themselves in the overbuilt state (Austin, Jacksonville, Las Vegas, Portland, and DC).  Apartments will continue in expansion in many markets, but the peak may be near, and an increasing number of markets are reported to be in contraction as 2015 turns into 2016.

As noted, the report is detailed, and this issue also features their less frequent surveys of medical office markets, development land, and student housing.  For your own copy (they come at a subscription cost, by the way) visit

December’s Livingston Survey

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The late columnist Joseph A Livingston started surveying economists about their forecasts back in 1946. It’s the oldest continuing survey of its kind, and is continued twice a year under the auspices of the Philadelphia Federal Reserve Bank. One of the neat things about this semi-annual report is that it compares the current central tendency of projections to the projections which were being made six months ago. In short, we can directly compare how economic forecasts are changing over time.

One of the biggest shifts is in the GDP growth rate for the 2nd half of 2015.  Six months ago, economists were projecting that we’d end the year with a modestly healthy 3.1% annual rate of growth.  Now, economists are forecasting we’ll end the year at about 2.1% — a fairly significant shift in sentiment.  Similar declines in GDP growth are projected for 2016.  Check my prior blog post about the 12th District report on the western economy, and particularly the impact a stronger dollar is having on the export market.

The good news — and it’s slight — is an improvement in the projections about unemployment.  Six months ago, economists were forecasting we’d end the year with an unemployment rate of 5.1%.  This has now been revised downward, ever so slightly, to 4.9%.  Also, inflation continues to be dead-on-arrival.  From the end of 2014 to the end of 2015, the consumer price index is projected to rise only 0.1%, in line with prior forecasts, and the producer price index is actually projected to fall by 3.2%.  Both indices are expected to swell in the coming year, but only slightly.  The current CPI forecast for the coming year is 1.8%, and PPI is 0.7%.  I’ll leave it up to the reader to pick a reason for this, but can you say “energy costs”?

Six months ago, interest rates were forecasted to rise.  Actual increases are somewhat lower than previously forecasted.  Six months ago, forecasters predicted we’d end the year with 3-month T-bill rates at 0.59%.  In reality, the November 23 auction was at 0.14%, although rates are trending up in December (0.28% as of Monday) in anticipation of Fed rate increases.  The current forecast is for 3-month rates to end the year around 0.23%, and for 1-year rates to end around 2.3% (down from the previously forecasted 2.5%).  Forecasters currently predict 3-month T-bills will hit 1.12% by the end of 2016, and 10-year notes will end next year around 2.75%.

Finally, forecasters are asked to predict the S&P 500 index for the end of the year as well as the end of next year.  Six months ago, the consensus forecast was an S&P level of 2158 for the end of the year, and this has now softened to 2090.  (It’s helpful to note that the S&P opened just under 2048 this morning.)  Forecasters currently project the S&P will hit about 2185 by the end of next year, which is an anemic growth of 4.5% over the coming 12 months.

If you’d like your own copy, which includes much more detail on these forecasts, you can download it for free here.

12th Fed District issues 3q report

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Greenfield is a global firm (albeit mostly in the U.S.), and even though we’re headquartered in Seattle, we try to focus our attention broadly rather than locally.  That said, the 12th Federal Reserve District just released First Glance 12L (3Q15) which takes an early cut at the data from the nine western states.   It’s very telling data — the “left coast” as I like to call it tends to suffer worse when times are bad and boom better when times are good.  Thus, there are some interesting facts and figures to be gleaned from this well-written report.

Naturally, the report is focused on the health of the member banks in the region, but the macro-econ factors driving that health are of much broader importance.  Nationally, unemployment stood at 5.1% at the end of the 3rd quarter.  Western states tended to be a bit worse off, with 3 states (Idaho, Utah, and Hawaii) recording lower unemployment rates and the rest showing higher numbers, ranging from Washington’s 5.2% up to Nevada’s 6.7%.  California, always the thousand pound gorilla in the room, came in at 5.9%.

However, job growth in the western states is well above the national average — 3% annually for the region versus 2% for the U.S. as a whole.  However, the west is digging out of a deeper hole — while job growth nationally hit a trough of -4.9% at the peak of the recession, it bottomed out at -6.7% in the west.  Generally, job growth in the west over the past 20 years had held steady at about one percentage point above the national trend during “boom” years.

Housing starts in the west are well below the pre-recession peaks.  As of September, 2015, the seasonally adjusted annual rate (SAAR) of housing starts stood at 161,000, with 107,000 of that in 2+ family units.  This compares with a peak of 449,000 SAAR in the 2005-2006 period, at a time when 2+ unit housing only made up 85,000 of the starts.  Arguably, the market in the west is still absorbing the huge shadow inventory built up during the boom days.

Commercial vacancy rates in the west have been drifting down for the past few years in the office, industrial, and retail sectors.   Apartments, however, seem to have plateaued around 4.3% at the end of the 3rd quarter, and are forecast to rise a bit to 4.7% a year from now.  I might posit that historically, profit-maximizing apartment vacancy rates have been found to be somewhat higher than these numbers, so apartment managers and owners may have some lee-way to continue building.

The 5 western maritime states are very export-driven, and the strength of the U.S. dollar (up about 18% against major currencies since 2014) has been rough news for those markets.   While western state exports rebounded nicely from the trough of the recession (up about 17% from 2009 to 2010), export growth has flat-lined since 2012.   Regionally, exports declined about 2.5% since last year, with positive growth reported in only four states (Arizona, Hawaii, Nevada, and Utah).  Bellweather California saw exports decline 3.6%.  Note that in Washington, my semi-home state, exports make up 21.2% of the gross state product.  (We export things like big trucks, big airplanes, software, and agricultural products.)  Hence, this is critically important stuff.

The remainder of the report focuses on the health of the regions banks.  I’ll leave that up to the reader if you care to download your own copy.  Short answer, though, is that the region has seen loan growth accelerate even while the nation as a whole has flattened.  Further, the regions banks tend to be a bit more efficient in terms of expenses and staff, both compared to the nation as a whole and compared to the “boom days” pre-recession.  Both small and large commercial borrowers generally reported tightening credit standards at the end of the 3rd quarter, which is a change from previous reports.  However, consumer borrowers (residential mortgage, credit cards, and auto loans) generally reported easier standards.  The bulk of loan growth for small banks (under $10B) came from non-farm non-residential, while for large banks the biggest growth sector was in consumer lending.  The percentage non-performing assets (the “Texas Ratio”) in the region, which peaked at 38.9% in 2009, is now down to 5.4%, although still higher than in the 2004-2007 period.  By comparison, the national peak hit in 2010 at 19%, and is now standing at 7%, also higher than pre-recession levels.