Weekly Market Update May 9, 2013

Commercial property price index: According to Real Capital Analytics, commercial property sales are off to a strong start in 2013, with sales totaling $72.8 Bn in Q1. The national all property price index was up 5.4% three months y/y and 5.9% on a 12 month basis, (Fig. 1). Apartments and hotel showed the strongest interest, yet gains were seen across the entire property portfolio. Lower rates and a firm outlook are expected to benefit the investment market for the balance of the year. Retail prices have increased by 8.1% over the previous three months, the best performance in the commercial segment. The number of distressed retail sales has fallen significantly over the last three months helping contributing to higher prices. During the past year major markets saw prices increase 6.5%, while non-major markets rose 5.3%. The CPPI has now recovered to 80.5% of the peak realized in February 2008.	Fig 1
Commercial property vacancy rates: Reis released their commercial property update for Q1 2013 on May 1st. Results were mixed. The good news is that apartment vacancy rates continue to tumble in all regions. The national rate was down to 4.3% in Q1, down from a high of 8.0% in Q1 2010. Absorption of apartment space is still far higher than completions suggesting that the construction boom for this sector is far from over. The vacancy rate for retail space fell to 10.6% from 11.0% in Q3 2010. The absorption of retail space was higher than completions in all regions but both are at very low levels compared to the boom years of 2000 through 2007. The surprise was that the office vacancy rate actually increased in the first quarter. In three out of five regions net absorption was negative meaning that more space was vacated than was leased. When combined with the small square footage of completions this drove vacancy rates higher in these regions. Only the North East had good performance in the office sector. Nationally the office vacancy rate fell to 17.0% in Q1 2013 from 17.6% in Q1 2011. At the national level, both completions of and absorption of office space have been at very low levels for 2 ½ years. Table 1 summarizes the Reis report by region and property type.	Table 1
Growth of GDP by sector, Q1 2013: The Bureau of Economic Analysis released the first estimate of Q1 growth last Friday. Growth accelerated to a 2.5% annual rate from the Q4 2012 rate of 0.4%. The major changes were in personal consumption and inventories, (Fig. 2). The personal consumption component grew from 1.28 to 2.24, inventories from negative 1.52 to positive 1.03. The non residential construction component declined from 1.28 to 0.22. Net exports and government expenditures were both a drag on growth. The April IMF forecast of US GDP growth through 2018 is very similar to the one the Congressional Budget Office made in February, (Fig. 3). Economy.com summarized the medium term future as follows; “Prospects for 2014 and 2015 are much brighter. Powered by pent-up demand and a revived housing market, real GDP growth will accelerate to near 4% in 2014, and job growth will consistently top 200,000 per month. The economy will have finally broken free from the long shadow of the Great Recession.” If accurate the prospect for 2014 will promote real steel growth above and beyond the recovery as business confidence recovers from the effects of sequestration and tax increases.	Fig 2
Employment Net Job Creation: Total nonfarm job creation for the month of April increased by 165,000, (Fig. 4). Over the last three months, job creation averaged 212,000 a month. Figures were revised upward for February and March, adding 332,000 and 138,000, respectively. February’s reading was the highest since May 2010. Seasonally adjusted nonfarm employment stands at 135.4 million, the highest since October 2008. The employment to population ratio has remained unchanged at 58.6, even after the big increase in February. The civilian labor force participation remained unchanged in April at 63.3, but has fallen since the start of 2013. This figure measures the share of the population 16 years and older who have jobs or are seeking work. The number of persons employed part time increased by almost 300,000 from March to nearly 8 million and 2.3 million persons were marginally attached to the labor force. This seemingly permanent unemployed/underemployed labor force is preventing the economy from gaining traction.	Fig 4
Employment Construction and Manufacturing: Total construction employment decreased 6,000 in April, the first decline since May 2012; however, nonresidential building construction employment increased 6,200. Nonresidential specialty trade contractor employment decreased over 11,000. Manufacturing employment for April remained unchanged from March. An extended spell of cold weather across the country may be at fault for the declines in construction and manufacturing. As spring and summer progresses, the employment situation for the two sectors will become clearer. Manufacturing added 528,000 jobs since its low point in February 2010. The recovery for construction jobs has not been as robust adding back just 261,000 over the same time period, (Fig. 5).	Fig 5
U.S. long product import licenses: April total long product import licenses were down 20% m/m and down 14% y/y. Rebar licenses plummeted 78% m/m and were down 18% y/y. Wire-rod licenses jumped 51% m/m but were down 37% y/y. Beams fell 20% m/m however are up 44% y/y. Merchant licenses rose 5% for the month and 20% y/y, (Table 2).	Table 2
ISM manufacturing and non-manufacturing indexes: The ISM manufacturing index declined by 0.8 to 52.07, three months y/y and is down 2.8 points y/y. The rate of expansion is slowing and the recent trend is bearish. The good news is by definition a reading over 50 indicates expansion. The ISM non-manufacturing index posted a value of 53.1 in April, up 2.1 points, three months y/y, but is down 0.4 points y/y. Its present trend is also negative, (Fig. 6). Economic activity continues to be hampered by a “hangover” from the fiscal cliff and sequestration debates. This has affected consumer confidence and spending patterns. There is a good deal of underlying strength (read potential) in the U.S. economy to include: Strong corporate and bank profits, favorable consumer debt service levels, increased housing starts coupled with rising prices, stable and improving employment situation and a very promising pent-up demand situation. Several economists expect the U.S. economy to accelerate during the second half of the 2013. An example is the Portland Cement Association which expects 3% GDP growth during the latter half of the year. PCA sites improved business confidence and increased political clarity to lead to accelerated employment gains thereby sparking accelerated growth.	Fig 6

This week’s contributors include: Bryan Drozdowski, Peter Wright and Steve Murphy.