Weekly Market Update - March 6, 2014

Commercial Property Price Index (CPPI): The Moody’s/RCA U.S. CPPI uses advanced Repeat-Sale Regression (RSR) methodology of qualified repeat sale observations to measure price change in commercial real estate. The national CPPI increased by 2.2% month on month and by 15.6% year on year, (Fig. 1). Retail posted the largest y/y increase, up 21.3% followed by core business district office, up 19.5% y/y. All property categories recorded double digit y/y price increases, (Fig. 2). Major markets (all property) continue to outperform non-major markets. As of December 2013, major markets have regained the peak price level attained in December 2007. Non-major markets posted stronger gains in 2013 as evidenced by the steeper slope on (Fig. 3). As of December 2013, the price index for non-major market properties was 83% of its peak level. According to Moody’s/Real, foreign investors accounted for 15% of sales volume in January as investment from China tripled over last year. In addition Middle Eastern buyers’ volume doubled. Cross border capital in-flows were up across all property categories. The influx of foreign capital is expected to continue. There is no shortage of capital available for real estate investment. Listed REITs raised a record amount last year. Competition for properties is pushing prices up quickly. Higher prices and greater demand for investment properties should drive greater interest for new construction going forward.

Fig 1

Currencies: The U.S. Dollar has strengthened 2.5% on a year over year basis but remained relatively flat in the past month against the Daily Broad Index, considering the turmoil going on in the global market. The Dollar strengthening makes scrap from the U.S. less attractive to buy on the global market and steel less attractive to buy from the U.S., (Table 1). The Russian Ruble has weakened more than 15% on a y/y basis; however, more importantly, it has fallen to all-time lows since the crisis in the Crimea region of Ukraine started. Russia had raised its lending rate from 5.5% to 7% as a result to maintain inflation targets and financial stability as investors may fear outright war with Ukraine or international sanctions. The Ukrainian Hryvnia has devalued 9% over the past month and almost 14% over the last three months. The country is torn between the western half, who are more supportive of the EU, and the eastern half, who are more aligned with Russia. The currency has tumbled since the protests began and the subsequent ouster of President Viktor Yanukovich and the Russian military entering the Crimea region of Ukraine. Also, another contributing factor of the decline of the Hryvnia is that Ukraine needs a $15 billion dollar loan from the IMF for 2014 and 2015 to avoid a default. The IMF is requiring greater exchange rate flexibility as part of the terms agreement for a loan. The Turkish Lira has strengthened nearly 2% over the past month since the Turkish Central Bank raised its overnight lending rate in January from 7.5% to 12%. This move was to counter the precipitous decline in the Lira, rising inflation, and outflows of capital after investors look to the United States for future higher returns after the Fed Reserve announced the tapering of the QE4 program. Fig. 4 presents a chart of several currencies (per US Dollar), each adjusted to base 100 in January 2007. It illustrates how volatile the fluctuations can be over time as well as displaying relative competitive advantage or disadvantage.


Durable goods orders: On a 3MMA basis durable goods orders have been slowing for three months from a y/y growth rate of 9.4% in October to 3.5% in January. This decline is insufficient to affect the long term growth curve which has had four other blips like this since the recession which is usually a result of the very volatile civil aircraft sector, (Fig. 5). The official statement from the Census Bureau contained the following remarks. New orders for manufactured durable goods in January decreased $2.2 billion or 1.0% to $225.0 billion. This decrease, down three of the last four months, followed a 5.3% December decrease. Excluding transportation, new orders increased 1.1%. Excluding defense, new orders decreased 1.8%. Transportation equipment, also down three of the last four months, drove the decrease, $4.0 billion or 5.6% to $67.3 billion. This was led by nondefense aircraft and parts, which decreased $3.4 billion. Shipments of manufactured durable goods in January, down two consecutive months, decreased $0.9 billion or 0.4% to $232.3 billion. This followed a 1.8% December decrease. Machinery, down following five consecutive monthly increases, drove the decrease, $0.9 billion or 2.6% to $34.5 billion. Inventories of manufactured durable goods in January, up nine of the last ten months, increased $1.0 billion or 0.3% to $389.1 billion. This was at the highest level since the series was first published on the North American Industry Classification System basis, and followed a 0.9% December increase. Transportation equipment, up twenty of the last twenty-one months, drove the increase, $1.1 billion or 0.9% to $123.0 billion.

Fig 5

Consumer credit: In Q4 2013 consumer credit outstanding (not including home mortgages) increased by 1.6%. This was made up of an increase of 1.1% in installment loans and 0.5% increase in revolving balances. Installment balances include student loans of about a trillion dollars which is close to half of the total. The rest is auto loans and other big ticket items. Revolving loans are mainly credit cards. The consumer’s attitude to credit card debt has changed drastically, and is down by 15.5% since the recession began. Installment loans are growing faster than before the recession and now have a CAGR of 7.5%, much faster than the growth of disposable income (Fig. 6). The ratio of outstanding installment and revolving debt is now 24.6%, only 0.1% below the all-time high of Q3 2007, (Fig. 7). We’re not sure what the outcome will be but do believe that for the recovery to have a sure foundation the consumer must de-leverage. The present rate of growth of consumer debt is unsustainable, the can is being kicked down the road and sooner or later the bill will have to be paid.

Fig 6

Portland Cement Consumption: The apparent domestic consumption (ADC) of cement is an excellent proxy for reinforcing bar usage as well as overall construction activity. Shipments were up 5.2%, 3 months y/y in December on a national basis. The largest y/y increase was in the Pacific region (+17.7%), followed by the South Atlantic (+12.1%). The West South central and East South central regions posted declines of 3.1% and 2.1% y/y respectively, (Fig. 8). Cement consumption reached 80,095 thousand metric tons in 2013, 4.5% increase compared to 2012. ADC reached its low point of 68,379 in 2009. This compares to its peak of 121,855 and 122,274 thousand metric tons realized in 2006 and 2007. So on a percentage comparison; we are up 17% from the recession low point, but still remain down 34% from the peak market, (Fig.9). From a volume perspective the West South Central continues to consume the most cement (25.4% of total US volume in 2013), and has exhibited the strongest post-recession recovery. The South Atlantic, the second largest, took-in 19% of total US volume and posted stronger growth in 2013 as did the Pacific region, in third place at 15.2% of total ADC. All regions of the country are showing growth since the recession ended, but there is considerable variation in the rate as illustrated in (Fig. 10).

Fig 8

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