Macroeconomic fundamentals

The demand for rental housing shows no signs of letting up. Data through mid-year show that the rental market continues to tighten despite increasing new supply, as the national rental vacancy rate fell to 6.8%, the first time it has been below 7% since 1985.

Tracing the building momentum in the commercial real estate market.

If good things come in threes, then the housing market is right on track—and that’s good news for REITs and commercial real estate, too. Sales of new homes, sales of existing homes and house prices are all on an uptrend. New home sales increased 2.2% in May and are nearly 20% above a year earlier.

We often get questions about where we are in the cycle. REITs and real estate are tied closely to the macro economy’s turns through expansion and recession. While the crystal ball is never very clear about the medium-term outlook, we can make several statements about recession risks. 

New construction of multifamily housing units slowed a bit in May from April’s torrid pace, yet remained on a rising trend. Multifamily housing starts were at an annualized rate of 349,000 units, down 18.5% from April but still well above the 300,000 unit trend that had been in place for the decade or so prior to the Great Recession. 

Nearly every property sector for REITs & commercial real estate depends on sustained growth of jobs, incomes and consumer spending to drive occupancy and rent growth. The latest data indicate that the recovery in the fundamentals for REITs & real estate remains on track, despite several setbacks during the winter and early spring.

Builders took advantage of spring weather and broke ground on 389,000 (annualized) multifamily units in April, a 32% increase from March. After a long and snowy winter season kept many new projects on hold, the strong uptrend in construction from the past several years appears to be underway again.

April non-farm payrolls and unemployment numbers offer encouragement that the labor market is regaining momentum after a weak show in March. The job market added 223,000 jobs in April, matching its 2014 trend and outpacing average growth in 2015 Q1. Further, the unemployment rate fell to 5.4%, its lowest level post-recession. 

Construction spending fell nearly 60 bps to a seasonally adjusted $966.6 billion in March, its lowest level in six months. Following a flat reading in February, growth in construction spending slowed to a 2% annual rate in March.

The fundamentals for the apartment sector continue to display strong performance. Demand for rental housing surged in the first quarter of 2015, with the total number of rental units increasing by 1.9 million units. This is the second consecutive quarter of healthy increases in rental occupancy, according to Census Bureau data beginning in 1965, surpassing a rise in rental occupancy of 1.5 million in the fourth quarter of 2007 at the onset of the housing crisis.

After a spate of soft numbers had hinted the housing market might stall, more recent reports show the recovery is back on. If the renewed upturn shows staying power, there are important implications not only for the housing sector, but also for the broader economy… and for REITs.
Sales of existing homes rose 6.1% in March, according to the National Association of Realtors®, to a 5.19 million unit annual rate. 

Multifamily housing starts declined in March, on the heels of a double-digit decline in February (first chart). Winter weather had an obvious impact delaying new construction across the nation in February, but the further decline in March suggests that the recent weakening of some macroeconomic trends, in part due to a stronger dollar and its impact on exports, may have damped builders’ enthusiasm for new projects.