Weekly Market Update - February 19, 2015

Vacancy Report (Reis): National office vacancies declined 0.1% q/q to 16.7%. National retail vacancies also declined by 0.1% q/q to 10.2%, while apartment vacancies remained flat at 4.2%. Industrial vacancies fell 0.5% to 9.0%, its lowest level since the year 2000. Absorptions exceeded completions in every category in Q4 2014 a solid sign that demand is improving in the non-residential construction arena, (Table 1). Office vacancies although slowly improving, remain high at 16.5% and are declining very slowly compared to the last recovery period (2004 to 2008), (Fig. 1). Retail vacancies are also coming down very slowly and at 10.2%, remain elevated vs. the pre-recession range of 6 to 7%, (Fig. 2). Industrial vacancies on the other hand are showing solid performance having dropped 2.7% since the high point in 2011. Strong demand for warehouse buildings as a function to the shift from brick and mortar retail to on-line ( retail have precipitated this change, (Fig. 3). Demand for apartments continues be very robust with national vacancy rates at 4.2%. Apartment construction has been one of the only bright spots in the construction market since the great recession as evidenced by the number of completions illustrated in Fig. 4.

Table 2 presents a summary of both national and regional vacancy rates, completions and net absorptions. If absorptions exceeded completions the segment is coded green to signify an improving condition. Alternatively if absorptions are less than completions red is used to indicate a deteriorating situation. In all cases, the office sector is showing an improving position. The Northeast has the lowest vacancy rate at 14.1%, the Midwest the highest at 19.4%. Apartment vacancies are low across all regions ranging from a high of 5.3% in the Southwest to a low of 3.5% in the Northeast. The Northeast has slightly more completions than absorptions indicating that future apartment construction may slow somewhat. As previously discussed, retail vacancies remain high and range from a low of 8.5% in the West to a high of 12.9% in the Midwest. The Midwest also recorded deteriorating conditions as completions far outstripped absorptions in Q4 2014.


Fig 1

Commercial Property Price Index (Moodys/Real): The CPPI ended the year at 185.24, its highest ever reading since the index began at 100 in the year 2000, (Fig. 5). Sales of significant U.S. properties ended the year at $423.8 Bn up 17% y/y with the Moodys/REAL Commercial Property Price Index up 13% y/y. Volume has returned to 2006 levels, with sales activity higher than the previous peak achieved in 2007. In addition cap rates are at their lowest point in history. Yet even as aggregate volume breaches previous records the situation is very different in the current market. Capital is widely available and cap rates are low making return on invested capital attractive at ever increasing transaction prices. As depicted in Fig. 6, greater demand for properties in the core business districts (CBD) has driven the sub-index higher (greater slope) when compared to the non-CBD sector. This is causing a shift in interest from investors to more fully explore the non-CBD looking for greater ROI.

Fig 5

Global Scrap Trade through Q3 2014: We already have US scrap exports through Q4 but because of the delay in reporting by many nations the ISSB global trade data lags by three months. We still think it worth reporting though as it helps explain where we are now. A drop in demand from leading purchasers in Asia and Turkey, a surge in Chinese billet and rolled product exports and collapsing iron ore prices were the chief drivers of the 17.1% decline in US scrap exports for 2014 as a whole. Total global scrap trade has decreased in the last three years, but of the big four exporting regions, the US, the EU, Russia and Japan, the US has accounted for most of the global decline, (Fig. 7). The US % share of total global scrap trade was in the mid-20s from Q2 2008 through Q1 2013 but has since declined to 17.5% in Q3 2014. Turkey buys more scrap on the global market than any other nation and in Q3 2014 accounted for 20.6% of the total. The US, the EU and Russia account for about 80% of Turkish supply but in the case of the US, shipments to Turkey are down by about half in the last 2 ½ years, (Fig. 8). Exchange rates are the major reason for the US decline and if present trends continue Russia will overtake the US as a Turkish source in 2015. China is no longer the player it was in the last decade and its purchases on the global market have been declining steadily since mid-2011, (Fig. 9).

Fig 7

Oil and Gas Prices and Rotary Rig Counts. February 2015: Fig. 10 shows historical gas and oil prices since January 2000. The daily spot price of West Texas Intermediate fell below $100 in August and by January 23rd was down to $44.80. By February 9th, the latest daily figure available from the Energy Information Administration, (EIA) the price of WTI had recovered to $52.99. Brent closed at $57.00 on the same day. The price of gasoline is being influenced both by the increase in the price of crude and by the labor unrest orchestrated by the United Steelworkers Union who represent workers at the Gulf coast refineries. Natural gas delivered to the Henry Hub in Louisiana fell below $4.00 in August, there was an uptick in November but since then the price has had an uninterrupted slide to $2.72 on February 6th. Fig. 11 shows the Baker Hughes North American Rotary Rig Count which is a weekly census of the number of drilling rigs actively exploring for or developing oil or natural gas in the United States and Canada. The oil rig count which had been trending flat for almost two years, accelerated in 2014 until October 10th when it reached 1,609 and has since responded to the collapsing oil price by declining to 1,056. Through February 13th there was no slowdown in the rate of decline. The gas rig count has fallen by 37 from this time last year and now stands at 300 a level not seen since July 1992. The total number of operating rigs is now 1,358 a decrease of 318 in the last month. Land rigs decreased by 316 to 1,306 and off shore by 2 to 52. On a regional basis the big three states for operating rigs are Texas at 598, down by 168 in the last month, Oklahoma at 171, down 30 and North Dakota at 123, down 33.

Fig 10

U.S. MSCI Report: The three month moving average (3MMA) daily shipment rate for all carbon long products was up 3.1% y/y in January. The percentage 3MMA y/y change has been positive for 18 consecutive months. Plate recorded the strongest gain, up 6.3%. Bar and shapes <3” posted the weakest shipments, up 0.9% y/y, (Table 3). Daily intake 3MMA rose 4.3% y/y for all carbon steel products, influenced by a 27.4% surge in pipe & tube. All product groups recorded increased intake y/y.  Overall monthly inventory levels grew by 16.7% y/y to achieve a 2.95 months on hand (MOH), up from January’s 2.8 MOH. Overall inventory levels have increased in six of the last seven months when examined on a three month moving average basis. Carbon plate posted the largest increase, up 28.2%, while sheet inventory increased by 17.6%. Structurals also posted a significant increase, up 16.6% y/y. Pipe & tube inventory levels rose the least, up 1.4%, 3MMA y/y. A spike in MOH historically occurs late in the year and the beginning of the New Year as shown in Fig. 12.

Table 3

Canadian MSCI Report: Overall daily 3MMA shipments from Canadian service centers fell by 1.9% y/y. Bar and shapes recorded the largest gain, up 6.8%, while sheet fell the most, off 5.1% y/y. Structurals and pipe and tube shipments fell by 1.7% and 1.4% respectively. Overall shipments were down 2.7% from the same period two years ago and were down 14.6% from where they stood three years ago. Daily 3MMA intake was off 2.8% y/y, led by a 7.9% drop in sheet. Monthly overall inventory levels surged by 20.2% y/y to 3.93 MOH, (3MMA) influenced by a 23.5% increase in sheet, a 19.7% surge in plate and an 18.0% jump in structurals, (Table 4).  Inventory MOH has increased in five of the last six months on a three month moving average basis.

Table 4

FOMC Minutes: The meeting from the January 28-29 FOMC meeting repeated similar sentiments from earlier meetings in 2014: interest rates would not be raised in the short term. With inflation nearing 1%, fed committee members said they saw no clear indicators that inflation would rise anywhere near the 2% mandate. The FOMC meeting is famous for producing key words from the Fed Chairwoman that could sway markets or lead to an indication of rising rates. The word from January’s meetings was “patient”.

The committee members noted that volatility in the financial sector has been subdued due to high levels of liquidity and capital. Consumer spending and economic growth in the first half of 2015 was to grow more rapidly in part to lower energy prices increasing the purchasing power for households (Federal Open Market Committee Minutes). Committee members noted that labor market conditions were gradually increasing, however, underutilization, such as those working part time for economic reasons, remained therefore leading to continued slack in employment. Another important topic discussed was that foreign economic situations play a big part in affecting the outlook for economic growth in the U.S. The ongoing situation with Greece and the troika has significant influence with foreign market conditions.

Federal Reserve

Unemployment Claims: New unemployment claims fell to 283,000 for the week ending February 14th, 21,000 lower claims than the previous week. This figure has been below the 300k benchmark for three of the four last weeks. The four week moving average is 283,250, 16% lower on a y/y basis. This figure smoothes the weekly volatility in reporting. The four week moving average is roughly 10,000 new claims fewer YTD 2015, (Fig. 13).

Seasonally adjusted continuing claims rose to 2.42 million, 18% fewer claims from the same time last year and roughly flat on a YTD basis. This indicator has remained below the 3 million benchmark for more than one year dating back to January 18th, 2014. The four week moving average has stayed below the benchmark since July 2013. Continuing claims have recovered 65% since the end of the recession in June 2009.

Fig 13

Steel Demand Indicators: Table 5 is a snapshot of the market situation on 2/19/2015. Indicators updated since we last published two weeks ago are shaded beige. The latest month or quarter for which data is available is identified in the 2nd column. Of the twenty seven indicators under consideration, the present situation of eleven are positive by historical standards, nine are negative and seven are neutral. This was an increase of one neutral and a decrease of one positive since the February 5th update. The change we made was to our classification of the producer price index of commodities for which the Bureau of Labor Statistics data has finally caught up with the price of oil. The PPI of commodities fell in yesterday’s report from 200.8 to 197.0, we require a value of > 200 for us to classify as positive. The value of this index has a reasonable correlation with industrial construction which has been heavily energy driven for the last few years. There were no other changes in the present situation analysis. In our trends analysis, most of the values reported are three month moving averages to avoid the knee jerk reactions that are characteristic of most economic reports in the press. Please note that there is nothing subjective about this trends analysis. The numbers presented here are the latest facts available as of today’s date. Overall there was an increase of one negative trend during the last two weeks of data releases and a decrease of one positive. The price of Chicago shredded which inexplicably trended positive last month with a $9.00 increase crashed by $89.00 in February, a number which our benchmark analysis had predicted. All other indicators continued to trend as they did in our February 5th update. Two data results that didn’t change direction in the recent reports are worthy of special note. The employment numbers for job creation released on the 6th were very strong and supported by upward revisions to November and December’s data and the Broad Index value of the US $ continues to surge. We regard a strengthening dollar as a negative because of the influence it has on net imports and domestic prices. (Explanation of Indicators).

Table 5

Contributors this week include; Bryan Drozdowski, Peter Wright and Steve Murphy