The FTI Consulting Economic & Real Estate Report - 3rd Quarter 2013
The first advance estimate of 3Q13 gross domestic product (GDP) showed the U.S. economy accelerated at a 2.8% annualized rate, exceeding consensus expectations; however, much of the increase in GDP resulted from businesses unexpectedly building their inventories. Excluding the jump in inventories, GDP grew at only 2.0%, suggesting underlying demand remains weak. The latest data points to an economy growing at about the same subpar growth pace that has slowed the economic recovery, now in its fifth year. Although the partial government shutdown, which occurred from October 1 to October 16, did not figure in the latest numbers, the continued decline in federal spending from July throughout September showed how cuts imposed by Congress have hurt the economy.
On September 18, the Federal Reserve decided against tapering its monthly bond purchases totaling $85 billion, indicating it wants to see more conclusive evidence that of a sustained economic recovery. Weak employment data from September and the recent slowdown in existing home sales have lessened the chances of tapering occurring in 2013. Despite on-going concerns about the economic recovery, U.S. stocks posted strong returns during 3Q13, boosted by encouraging signs in the global economy and strong readings on U.S. manufacturing and service activity.
The labor market lost momentum during the summer months, suggesting that the U.S. economy may be stalling. 3Q13 employment gains lagged behind output set during the first half of the year. It was reported that 148,000 jobs were created in September, below consensus expectations. Over the previous 12 month period, the U.S. economy averaged 185,000 job gains per month. The unemployment rate fell slightly to 7.2%, but the total number of unemployed people, at 11.3 million, changed little from August.
Despite the recent lackluster performance in the economy, the commercial real estate market continued its gradual recovery during 3Q13. Real estate market fundamentals generally continued to improve, characterized by growing absorption, rental rate growth, increased construction activity and cap rate compression. The NCREIF Property Index reported its fifteenth consecutive quarter of positive growth in 3Q13. According to Real Capital Analytics, despite increasing interest rates, sales of commercial properties gained momentum during the summer months as portfolio sales increased during the quarter and investors continued to chase higher yields and explore deals in secondary and tertiary markets.
Undeterred by rising interest rates, there was further recovery in the real estate debt markets. CMBS issuances are on pace for the strongest output since 2007, U.S. CMBS delinquency rates continue to retreat, and the delinquent unpaid balance for CMBS decreased to its lowest level since January 2010. Commercial and multifamily mortgage lending and borrowing remained unchanged from the prior quarter in 3Q13, but outpaced volume recorded during the same period last year by nearly 30.0%. According to the Federal Reserve Bank Senior Loan Officer Survey, banks continue to ease standards on commercial real estate loans with increased demand for construction and land development loans. After raising a record amount of capital in 2012, REITs raised nearly $61.0 billion in capital during the first three quarters of 2013 and are on pace to eclipse the record high recorded during last year.