The FTI Consulting Economic & Real Estate Report - 1st Quarter 2013

Real Estate & Infrastructure

June 12, 2013

After stalling late in 2012, the U.S. economy rebounded during the first three months of 2013. The first advance estimate for gross domestic product (GDP) showed that the U.S. economy expanded at a 2.5% annualized pace during 1Q13 after growing just 0.4% in the prior quarter.

However, the pace of growth was slower than most economists had expected, as the latest GDP report reveals concerns about the impending consequences of federal spending cuts, known as sequester, that went into effect March 1. Several indicators pointed to slower growth to close 1Q13. Total payroll jobs increased only 88,000 in March, well below consensus estimates and less than the 208,000 average recorded during the first two months of 2013. Other lagging indicators in March included a decline in consumer confidence, a drop in durable goods orders, a dip in construction activity, a fall in retail sales and weaker manufacturing output. Still, there were several positive developments during 1Q13. The housing market recovery continued, consumer spending increased, the stock market remained bullish and automobile sales were solid. Still, there are numerous challenges facing the U.S. economy, including the European recession, domestic job growth and government spending cuts.

The U.S. commercial real estate market continued its gradual recovery during 1Q13. Following a flurry of transactions to close 2012, investment activity is surpassing the pace set during the same period last year, as more investors continue to chase higher yields and explore deals in secondary and tertiary markets. After raising a record amount of capital last year, REITs continued to benefit from a low interest rate environment and raised nearly $23.0 billion in capital during 1Q13. During the latest quarter, capitalization rates compressed for the majority of major property types and positive absorption, resulting from low supply, continued. Despite recovery in the single-family housing sector, investor sentiment and fundamentals remain the most positive within the multi-family sector. Also, continued low interest rates resulted in growing CMBS issuances as 1Q13 volume was the largest in more than five years. Additionally, distress associated with property transactions continued t decline, but commercial lending decreased from the previous quarter during 1Q13.


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