The FTI Consulting Economic & Real Estate Report - 4th Quarter 2013

Real Estate & Infrastructure

March 25, 2014

Despite a partial government shutdown in early October, the first advance estimate of 4Q13 GDP showed that the U.S. economy increased at an annual rate of 3.2%, primarily driven by an increase in consumer spending. Seeing strengthening momentum in the economy, the Federal Reserve announced on December 18th that it would start to taper its aggressive bond-buying program from $85 to $75 billion per month, beginning in January 2014. Bullish investors shared the Fed sentiment as the three major U.S. stock indices continued to soar. The DJIA and S&P 500 both ended 2013 at record high levels and the NASDAQ settled at its highest level in 13 years.

Despite a slowdown towards the end of 2013, the housing market recovery continued to positively impact the national economy. The National Association of Realtors reported that 2013 existing home sales were 9.1% greater than in 2012 and were at the highest level since 2006. Core Logic reported that home prices had the highest annual increase since 2005, increasing 11.0% year-over-year in December 2013.

The labor market lost momentum in December as only 74,000 jobs, well below consensus estimates. Despite the lag, nearly 2.2 million jobs were created in 2012, on par with job creation recorded during the past two years. Still, the unemployment rate fell to 6.7%, the lowest level since October 2008, as more people continued to drop out of the labor force.

Despite the disappointing employment report, several other labor market indicators, including the ADP employment survey, ISM survey, Challenger layoff announcement and weekly firsttime unemployment claims continue to suggest that the labor market is improving. In addition, consumer confidence increased in December and retail holiday sales exceeded expectations to end the year.

Continued strong demand for U.S. properties allowed the commercial real estate market to continue its recovery to end 2013. Market fundamentals generally continued to improve, characterized by rental rate growth, increased absorption, more tenant and investor activity and increased construction activity. The NCREIF Property Index reported its sixteenth consecutive quarter of positive growth in 4Q13 and the average overall capitalization rate declined for the eighth straight quarter as reported within the PwC Real Estate Investor Survey. Despite rising interest rates, investment activity gained momentum to close 2013, as investors continued to develop a greater appetite for risk and were attracted by higher yields and discounted prices in secondary markets that had been previously overlooked.

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