Source: Wells Fargo Securities Economics GroupSearching for Certainty in an Uncertain World
The U.S. economy continues to bounce from event to event with seemingly little change to its
underlying momentum. The presidential election produced no significant net change on the
policy front. President Obama was re-elected and congress remains divided, with Republicans
controlling the House and Democrats controlling the Senate by similar majorities to what they
had prior to the election. The financial markets reacted negatively to the result, however, as it
suggests the resolution of the fiscal cliff will be no easier than it was previously. The stock
market’s instant reaction also meant that attention shifted to the fiscal cliff immediately, which
means getting the presidential election behind us increased the general anxiety level rather than
reduce it. Europe’s ongoing financial crisis and recession is also weighing on economic growth.
Our forecast calls for real GDP growth to slow to a 1 percent pace or less during the final quarter
of 2012 and the first half of 2013. The slowdown is primarily due to increased uncertainty, which
has caused businesses, both large and small, to put off key decisions on capital spending and
hiring. What little strength is present in the economy appears to be broadening. Residential
construction is one clear area of improvement, and gains in homebuilding should ultimately
follow through to commercial construction as well. A resolution to the fiscal cliff, even one that is
less than optimal, should also provide a sense of relief for businesses and households and may
unleash a short-term boost to investment, hiring and consumer spending.
The sluggish economic recovery has kept commercial real estate in the slow lane. All property
types have seen some improvement, thanks mostly to record low levels of new construction.
Apartments have seen the greatest improvement, benefiting from increased household formations
and tighter mortgage underwriting standards. Warehouse and industrial markets have also seen
demand improve. Vacancy rates have improved much less in the office and retail sectors.
CRE Property Fundamentals
- Operating fundamentals for all major property types
improved in the third quarter, but the pace remains
tepid. The vacancy rate for apartments, office and
industrial edged lower, while retail was unchanged.
- Cap rates across property types have remained fairly
stable and will likely continue to be range-bound
through 2013 as the Fed remains on hold. The
spread between cap rates and the 10-year U.S.
Treasury yield is now at an all-time high of
5.2 percentage points, which is well above the
long-run average of 3.5 percent points.
- According to RCA, sales across all property types
totaled $20.6 billion in October, a 9 percent increase
on a year-ago basis. All property types, with the
exception of office, posted gains.
- Operating fundamentals continue to modestly
improve for the industrial market, with the vacancy
rate now at 8.7 percent, a decline of 80 basis points
over the past year. However, much of the drop in the
vacancy rate is due to demolitions, which are
- With slow manufacturing activity, retailers and
distributors are leading the way. Large national
distribution markets including Chicago, Los
Angeles, the Inland Empire and Indianapolis are
accounting for the bulk of industrial growth.
Moreover, while online sales make up only
10 percent of total retail transactions, e-commerce
tenants like Amazon are helping to push up demand
for large warehouse space.