The FTI Consulting Economic & Real Estate Report - 1st Quarter 2014
During the first three months of 2014, the U.S. economy underperformed as the second estimate of GDP showed a 1.0% decline in growth, down from a 2.6% increase during 4Q13. Economists attributed this poor output to the bad weather that gripped much of the nation during the quarter. Looking past the GDP weakness, the Federal Reserve continued a reduction to its quantitative easing program by tapering its monthly bond purchases. Housing market weakness remained during 1Q14, largely due to lack of inventory, adverse weather, rising prices, and homebuilder concerns related to the shortage of buildable lots and skilled workers. Despite an early sell-off, mainly resulting from emerging market concerns, quantitative easing and a subpar December employment report, U.S. stock markets recovered throughout 1Q14, resulting in minor changes within the leading indices since 2013.
On the positive, several economic indicators rebounded in March, which is expected to provide momentum and optimism in the upcoming months. The labor market strengthened towards the end of 1Q14, as 192,000 jobs were added to the economy in March, and it was announced that job gains were revised upwards during the prior two months. Throughout March, retail sales recorded their largest monthly gain in two years, U.S. consumer confidence increased, the Leading Economic Index grew stronger, manufacturing output strengthened and durable goods orders increased.
Sustained demand for U.S. commercial real estate assets resulted in continued market recovery during the first three months of 2014. According to several leading brokerage and commercial real estate information providers, improving property fundamentals within the commercial real estate market during 1Q14 were illustrated by falling vacancy rates, rental rate growth, positive investor sentiment and more tenant activity. The NCREIF Property Index reported its seventeenth consecutive quarter of positive growth in 1Q14 and the simple average overall capitalization rate (comprising the office, retail, apartment and industrial sectors), declined for the eighth consecutive quarter as per the 1Q14 PwC Real Estate Investor Survey. After a flood of activity to end 2013, driven by higher risk tolerance from investors and the attraction of higher yields and discounted prices in secondary markets that were previously overlooked, investors once again had a strong appetite to acquire product during 1Q14.
Despite a slowdown in several metrics, real estate debt markets remained generally healthy to start 2014. After reaching the highest level since 2007 last year, CMBS issuances were slightly off the pace set in 1Q13. The U.S. CMBS delinquency rate continued to decline and the delinquent unpaid balance for CMBS dropped to its lowest level since late 2009. During 1Q14, commercial and multifamily mortgage borrowing declined slightly from this same time period in 2013 and the most recent Senior Loan Officer Opinion Survey on Banking Lending Practices indicated that U.S. banks increased bank lending during 1Q14 and eased policies for commercial and industrial real estate loans, while reporting stronger demand for both types of loans. After raising a record amount of capital last year, REIT capital raising slowed during 1Q14, likely due to the low interest rate environment and the increased number of senior debt issuances.