Weekly Market Update - October 31, 2013

Commercial Property Vacancy (Reiss): The national office vacancy rate was 17.0% in the second quarter ending June 2013. Completions slightly exceeded absorptions as office construction activity picked-up over the first quarter, (Fig. 1). Vacancies were the lowest in the Northeast (14.3% same as the previous quarter), and highest in the Southwest (18.0% down 0.1% q/q). Both the Midwest and West recorded identical vacancies rates of 17.6% down 0.1% q/q. The South-Atlantic region vacancy rate was 16.9%, no change from Q1.

Apartment vacancy rates stood at 4.3% down from 4.8% a year ago and down 1.6% from two years ago as pent-up demand for new household formations continues to take hold. Rates range from a low of 3.6% in the West to a high of 5.7% in the Southwest. Apartment construction has been gaining strength since 2010 as demand surged at the end of the downturn, (Fig. 2). In Q2 absorptions were less than completions in every area of the country signaling that supply has begun to exceed demand, (Table 1). Dodge apartment starts (> 4 stories) supports this argument having plateaued over the last year, (Fig. 3).

National retail vacancies have begun to decline, (Fig. 4). After peaking at 11.1% in Q3 2011, they have gradually declined and now stand at 10.5%. Absorptions have been stronger than completions for several quarters suggesting that there will likely be more construction activity in this sector in the future. Strong gains in online shopping have restrained growth in brick & mortar retail shifting to greater demand for warehouse space to drive increasing internet sales.

  Fig 1  Table 1
Fig 4

Industrial Production: The Global Industrial Production Index measures the monthly output from four industries: mining, manufacturing, gas, and electric. Its baseline is 2002 = 100. The seasonally adjusted global industrial production index for September was 100.0439, up 0.6% from August’s reading of 99.4753 and 3.2% on a year over year basis. The index is at its highest reading since February 2008. The overall index has been above 98 since November 2012. September’s reading is up 19.7% since June 2009, the lowest during the Great Recession, (Fig. 5).

Fig 5

Consumer Confidence: The Consumer Confidence Index fell dramatically in October to 71.2 from September’s reading of 80.2, an 11% decline, (Fig. 6). The Present Situation Sub-Index fell from 73.5 to 70.7, but more importantly the Expectations Sub-Index fell from 84.7 in September to 71.5 in October, an alarming 15.8% decline month over month and 21.5% down from June 2013’s six year high of 91.10. Labor market expectations also fell in October. This is no doubt due to the government shutdown that lasted 16 days and the debt ceiling fiasco in Washington. Since Congress only agreed to a 3 month resolution for the budget and rise in the debt ceiling, consumer confidence is bound to remain weak until longer term solutions are realized.

Fig 6

Commercial Property Price Index: The CPPI increase changed very little m/m but was up 12.4% y/y. Commercial property prices are now close to the previous peak reached in December 2007, (Fig. 7).  By overlaying Construction put-in-place (CPIP) data from the U.S Census Bureau and shifting the Moody’s CPPI data forward to obtain the optimal correlation coefficient (0.951), we get a glimpse into what the future might hold for non-residential construction, (Fig. 8). Note that the construction put-in-place (red line) had fallen away from the CPPI (blue line) thus far in 2013. It seems reasonable to expect that the two lines will begin to parallel each other once again when business and consumer confidences are restored.

Fig 8

Job Openings (JOLTS): The US Job Openings & Turnover Survey reported 3.883 million openings at the end of August, a 2% rise from the previous month and highest level since May, (Fig. 9). Total hires remained at 4.488 million while total separations were also unchanged at 4.376 million, a net change in employment in August of +112,000. The Midwest and Northeast regions experienced a rise in job openings, whereas the South and West regions declined from July. The Northeast had the largest rise, 14% month over month. The construction, manufacturing, and trade, transportation, and utilities industries all experienced a rise in job openings in August, 11%, 14%, and 11%, respectively. Total private layoffs rose for the first time since May while total government fell in August continuing its four month trend.

Fig 9

Steel Demand Indicators: Table 2 is a snapshot of the market situation on 10/31/13. There has been no change in the “Present situation” since this analysis was last published on September 26th. Ten of the “present situation indicators are still depressed by historical standards of which five are construction indicators. These are identified in red. Only 8 of 28 “Present” situation indicators are green but this is the best situation since this analysis was initiated 2 ½ years ago. Overall trends are good with 21 of 28 indicators moving in the right direction. In most cases values are three month moving averages. There has been a net change of one in the positive trend count since September 26th. The price of Chicago shredded increased which we regard as a positive move and net long product imports declined by 20%. Commodity prices declined slightly which we regard as a negative indicator trend for future industrial construction. Long product shipments continued to decline at both the mill and service center level compared to the same period last year. Capacity utilization which is recorded as a 3MMA m/m improved. There are two negative trend indicators for construction. Infrastructure expenditures continue to be negative and the PPI of commodities declined as mentioned above. There were no negative trends for manufacturing. The latest month or quarter for which data is included is identified in the 2nd column. Due to the government shut down, some indicators have not yet returned to their updated schedule. Indicators updated since last published are shaded beige. (Explanation of Indicators).

Table 2

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