Weekly Market Update - July 10, 2014

Vacancy Report (Reis): National office vacancies declined 0.1% q/q to 16.8%. National apartment vacancies also declined by 0.1% to 4.0% and National retail vacancies remained flat at 10.4%. Absorptions exceeded completions in every category and every region except for retail in the Northeast which was just slightly negative. Office vacancies ranged from a low of 14.2% in the Northeast to a high of 19.6% in the Midwest. Apartment vacancies at the end of the first quarter were just 3.3% in the Northeast, 3.4% in the West, 3.8%, in the Midwest, 4.7% in the South Atlantic and 5.1% in the Southwest, (Table 1). Fig. 1 charts apartment vacancy rate along with absorption and completions on a National basis. Vacancies are down sharply since the recession high point of 8.0% and with absorptions exceeding completions, it will likely head lower still. Apartment rents are moving up in every region, led by a 4.1% y/y increase in the Southwest, the Midwest saw the smallest decline at 3.1% y/y. The Northeast has the highest rents by far, asking rent averaged $1,688 per month, the Southwest’s average rent were almost half that amount at $884 per month, (Fig. 2).

Office vacancies have been painfully slow to decline, falling just 0.8% since its 17.6% peak in 2010, (Fig. 3). This situation should improve as the economy is starting to add jobs at a pretty good clip over the past couple of months. Moody’s expects the jobless rate to reach 5.7% by September, exceeding the Fed’s projections. The decline in the retail vacancy rate has also been exceedingly slow, (Fig. 4). It peaked at 11.1% in mid-2011 and had dropped just 0.7% through the first quarter 2014. Cautious consumer spending coupled with competition from online retail businesses like have restrained demand for new construction.

The industrial vacancy rate is declining at a sharp clip, reaching 9.0% the end of Q1, down 2.7% from its peak in 2010 and nearing its historic low (available data from 1990) of 7.8% in 1996. Strong demand for warehouse and manufacturing buildings have been the key driver in this segment, (Fig. 5).

  Table 1

Fig 3

Fig 5

Manufacturing Capacity Utilization was up 1.37% y/y in May and up 0.75% comparing the first five months to the same period last year, (Fig. 6). Manufacturing Capacity Utilization is currently in the low range of the “ideal zone” of 75 to 85% at 77%. It has been in this zone now for 29 consecutive months. Therefore the U.S. continues to have a lot of underutilized capacity and is nowhere near overheating. Manufacturing construction three month rolling total recorded $7.06 Bn in May, up 1.5% y/y. Comparing the two indexes on the same chart and shifting construction forward by 21 months illustrated that the two are correlated (72.0%). Thus manufacturing construction utilization is a good proxy for future manufacturing construction activity, (Fig. 7).

Fig 6

Portland Cement Consumption increased by 7.0%, 3 months y/y to 19,667,000 metric tons in April. All regions of the country realized growth with the exception of New England and the Middle Atlantic which were off 1.4% and 4.9% respectively. The West North Central region surged by 19.6%, 3 months y/y, while the South Atlantic saw 9.9% y/y gains. Portland cement consumption reached a 12 month moving average of 89,662,000 Mt in April, the highest level reached since May 2009 when 90,741,000 Mt shipped. To put this number in perspective, the peak 12 month moving average shipment value occurred in May 2006 at 138,433,000 Mt. (Fig. 8). Fig. 9 compares regional consumption volumes from 2004 to present. The Southwest has enjoyed the strongest recovery since the recession ended, followed by the South Atlantic and Pacific West. Elsewhere, growth is flat to include the Northeast, the East South Central and the Middle Atlantic.

Fig 8

Net imports of long products through May 2014: In May net imports on a 3MMA exceeded 400,000 tons for the first time since the recession. Imports have risen strongly in the three months through May as exports have also increased but only slightly, (Fig 10). Year to date total long product net imports are up by 591,127 tons of which wire rod and drawn wire accounted for 422,852 tons, (Table 2). Green figures in the table indicate a trade surplus. Only heavy structurals have a surplus and this has dwindled from 156,501 tons in 2013 through May to almost zero this year. This is a huge shift in trade direction for structurals for which the very healthy surplus with Canada and Mexico swamped imports to the U.S. from off-shore in recent years. Fig. 11 shows monthly net imports graphically since January 2011 with the meteoric rise of rod and drawn wire. In the single month of May, the trade surplus of structurals changed to a trade deficit of 9,000 tons. The trade of light shapes and cold finished bars has been almost in balance for the last three years with a small deficit for both.

Fig 10

FOMC Meeting Minutes: The meeting minutes from the June 17-18 FOMC meeting (released yesterday), indicated that economic growth was to pick up in the second half of the year after a downward revision of first quarter GDP mostly due to the harsh winter conditions across a majority of the United States. The staff of the FOMC noted that second half growth will be attributed to further credit availability, increases in business and consumer confidence, and a declining drag from fiscal policy changes (FOMC Minutes). The staff indicated that their projection for inflation remained below the 2% mandate. Household spending appeared to have increased in recent months, however, most of the increases are due to household net worth increasing (rising equity prices) rather than income gains. Most participants claimed that a rise in income was a key element to the economic outlook.


Jobless Claims: New unemployment claims dropped to 304,000 for the week of July 5th, hovering around the 300k mark, a benchmark that normally indicates sustained economic growth. It is at one of its lowest numbers since pre-crisis levels, (Fig. 12). The four week moving average is 311,500, 11% lower on a y/y basis. This indicator smooth’s out weekly volatility in reporting. The four week moving average is roughly 40,000 new claims lower on a y/y basis. Seasonally adjusted continuing claims fell to 2.58 million, a 15% drop on a y/y basis. This indicator has remained below the 3,000,000 for most of the past ten months, with the four week moving average staying under for the 48th straight week, (Fig. 13).

Fig 12

Steel Demand Indicators: Table 3 is a snapshot of the market situation on 07/10/14. Seven of the “present situation” indicators are still depressed by historical standards, ten are neutral and ten are good. This is a change from nine, nine and nine when we last published this analysis on June 23rd. The three changes were as follows. Long product steel shipments and capacity utilization have finally crept to a level that we consider to be the low side of normal therefore have been re-classified from depressed to neutral. We have re-evaluated our view of service center bar and structural inventories from neutral to good. Months on hand in May were 2.41 and 2.46 respectively. Overall trends are good with 22 of 27 indicators moving in the right direction. This is a net change of one less positive since June 23rd. In most cases values are three month moving averages. Changes in the last two weeks of data releases were: Within the general economic indicators the Chicago Fed National Activity Index became less expansionary, and the broad index of the US $ strengthened slightly. We regard a strengthening $ as negative because of its effect on net trade. There was one change to indicator trends within the long products steel section as the price of Chicago shredded strengthened by $10 on July 9th. There were no changes in the trend indicators of construction and manufacturing. All continue to be positive at this time. The latest month or quarter for which data is included is identified in the 2nd column. Indicators updated since last published are shaded beige. (Explanation of Indicators).

Table 3

Contributors this week include; Laura Remington, Brian Drozdowski, Peter Wright and Steve Murphy