A monthly survey of REALTORS® about their transactions in April 2015 indicated a pickup in market activity and more widespread confidence compared to the situation in March 2015 and a year ago. The April 2015 report is based on the responses of 2,012 REALTORS® about local market conditions in March.
The seasonal uptick in market activity in spring and summer, low 30-year fixed rates of below 4 percent, continued job growth, and recent measures to make credit more accessible and cheaper (e.g., lower FHA mortgage insurance, 3 percent downpayment for GSE-backed loans) appear to be having a positive market impact.
For the third month in a row, the REALTOR® Confidence Index-Six-Month Outlook was above 50 across all property types (single family townhomes, condominiums), indicating that the number of respondents who viewed the market as “strong” outnumbered those who viewed the market as “weak.” Inventory remained tight as indicated by the Seller Traffic Index which stayed below 50. With stronger demand and tight supply, homes sold realtively quickly, typically within 39 days. First-time homebuyers continued to account for 30 percent of existing home sales, while investors accounted for 14 percent. Given the decline in sales to investors, cash sales accounted for 24 percent of sales.
- New home construction is desperately needed to alleviate the on-going inventory shortage in much of the country. Good news! Housing starts rose decisively in April. The growth in new home construction will further help expand employment in the construction industry.
- In April, housing starts rose 20 percent from the prior month to a seasonally adjusted annualized rate of 1.14 million units. This is the strongest activity in over 7 years. Single-family starts rose 17 percent while multifamily starts increased 27 percent during the month. The longer-term trend shows multifamily activity essentially back to its historic norm, but single-family starts still need to rise by another 50 percent to get back to normal.
- The Northeast region posted the biggest gain of 89 percent, but this is just a reflection delayed activity after a deeper and snowy winter. The West region notched up 39 percent. The most acute inventory shortages have been in this region so this is indeed good news. The activity in the Midwest increased 28 percent. In the South, housing starts fell by 2 percent. To the extent that the decline is likely in the Texas oil markets, it is understandable.
- Housing starts have been greatly underperforming in this recovery cycle compared to the past. Even the latest figure of 1.14 million is woefully inadequate compared to about 1.5 million that is needed. Snap back recoveries were the norm. Not this time. Why? People no longer want to work outside with a hard hat? Construction loans from local banks are extremely difficult to obtain because of new bank regulations and excessive compliance rules? The end result of slow housing starts will be faster home price growth and possibility a greater wealth inequality in America.
- As an aside and opining: the widening inequality and the lack of homeownership opportunity should concern us all. One may say that America was the first country to transform working-class citizens into middle-class citizens when the homeownership rate rose went from minority to majority (from 40 percent in the 1930s to 60 percent in the 1950s). The recent fall in the homeownership rate partly due to fast increases in home prices from underperformance in new home construction is therefore not the direction the country should be headed.
Based on information for cap rates in NAR’s Commercial Real Estate Market Trends report one can conclude that the small commercial real estate (SCRE) market for properties less than $2.5 million is distinctly different from the large commercial real estate market (LCRE). . NAR has estimated that the commercial market for buildings selling for under $2.5 million could be in the neighborhood of $50 billion annually, compared to the market for large buildings—which totaled $438 Billion in 2014.
REALTORS® have reported that SCRE cap rates averaged 8.0 percent during Q4.14. Data for the LCRE segment for recent cap rates averaged 6.8 percent in the latter part of 2014. Whereas steady cap rate compression characterized the past six years in major markets, capitalization rates in SCRE markets exhibited higher volatility. Moreover, data from SCRE markets clearly display the yield premium associated with secondary/tertiary markets. Averaging the cap rates in LCRE markets over the 2010-14 period, results in a 4-year cap rate of 6.9 percent. Applying the same procedure to data from SCRE markets produces a 9.4 percent yield.In general, the markets view small commercial buildings as more risky and difficult to finance than is the case for larger buildings. This has been illustrated in the slower post-recession recovery of secondary/tertiary markets, both in terms of fundamentals and asset prices. Conversely, during 2013 and 2014, as investors—buoyed by rising capital availability and shrinking inventory in top-tier markets—shifted their focus to stable markets offering yield premiums over the 5 – 6 percent caps in major markets, secondary/tertiary markets experienced a rebound. More information on commercial real estate markets can be accessed here.
The average property transaction in commercial real estate markets served by REALTORS® has been in the neighborhood of $1.6 million, significantly below the $2.5 million threshold typically used by major databases in compiling sales information. The markets for small commercial real estate properties (SCRE) under $2.5 million appear to be very different from those for large commercial real estate properties (LCRE) selling for more than $2.5 million—and sometimes much more. NAR has estimated that the SCRE market could be in the neighborhood of $50 billion annually, compared to the market for large buildings—which has averaged $360 billion and above in recent years. These appear to be distinctly different markets.
In terms of price, REALTORS® reported that commercial sales prices increased 4 percent year-over-year during 2014. Data for the LCRE market segment indicated a year-over-year price increase of approximately 21 percent. Taking a longer horizon approach, the differences in price growth have remained wide apart. Comparing year-over-year price growth rates for the two markets during the 2009-14 period illustrates the steep decline in valuations for assets in in the SCRE markets. Even with the recovery of the past two years, sales prices in the SCRE markets from 2009 to 2014 are still down 7.6 percent. Prices in the LCRE markets are up 1.1 percent.
More information on commercial real estate markets can be accessed here.
- The birth rate in America has been on a long-term decline as people are deciding to have fewer babies and at a later age. The most recently available data shows the lowest birth rate in the U.S. modern history. But due to the overall rise in the number of child bearing years over time, the actual number of live births in the U.S. has been fairly steady at around 4 million each year.
- There are 4 million births each year. There are also about 2 million deaths each year. So the natural process is yielding a gain of about 2 million in population. In addition, immigration makes up another ½ million to one million each year. The total U.S. population, therefore, rises by roughly 3 million each year.
- Nothing can be simpler to understand than the fact that more people mean more housing demand. To accommodate the rising population, about 1.5 million new housing units need to be built each year (including the need to replace demolished units). Unfortunately, housing starts have averaged only 766,000 per year from the economic downturn in 2008 to 2014 (7 consecutive years). These multiple years of undersupply compared to what is needed is the reason why much of the country is experiencing a housing shortage with few inventory of homes for sale and falling apartment vacancy rates. Consequently, rents and home prices are rising by at least twice as fast as wage growth.
- Housing starts have to kick higher soon. Otherwise housing shortage will continue. Housing affordability will take a hit as a result. Many people may then be forced to live in squeezed places. An unhealthy development.
- The most famous live birth of recent days is of Princess Charlotte in Britain. One thing that is nearly assured of Charlotte is that she will be judged in the future as one of the more attractive persons among the royal families. Why? Simple. The mother Kate Middleton was a commoner. Where royal blood mixes with another royal blood, many healthy issues appear. Moreover, it is well known at European courts that the royal family of Monaco is said to be the better looking. And this is no doubt due to Monaco royals’ long history of marrying a commoner and doing it without much qualms.
The investment sales markets for large and small commercial buildings are distinctively different. NAR’s Commercial Real Estate Market Trends report summarizes sales and rental activity based on a quarterly survey of commercial REALTOR® practitioners. A second report, NAR’s yearly Commercial Lending Survey report provides information on commercial real estate financial issues addressed by REALTORS®. Both reports present commercial real estate information generally not available elsewhere: the average commercial transaction size in markets served by REALTORS® has been about $1.6 million, significantly below the $2.5 million threshold typically used by major databases in providing information on commercial transactions. Although many REALTORS® participate in transactions above the $2.5 million threshold, in general REALTORS® report that they serve a segment of the commercial real estate market for which data are generally not reported—Small Commercial Real Estate transactions (SCRE) under $2.5 million, in contrast to Large Commercial Real Estate transactions (LCRE) over $2.5 million.
NAR has estimated that the commercial market for buildings selling for under $2.5 million could be in the neighborhood of $50 billion annually, compared to the market for large buildings—which totaled $430 Billion in 2014. A comparison of the two market segments—SCRE properties valued below $2.5 million vs. LCRE properties valued above $2.5 million shows their difference in terms of sales.
In 2014 REALTORS® reported an increase in SCRE sales volume of 10 percent year-over-year. In comparison, data for the LCRE segment showed a sales volume increase of 21 percent for 2014 vs. 2013. The contrast between the two markets is sharper when taking into account a longer time horizon, and it underscores the post-recession difficulties experienced in sales of smaller buildings and properties located in secondary/tertiary markets. Over the 2009-14 period, sales volume for LCRE markets averaged 35 percent growth. For the same period, sales volume in SCRE markets averaged a negative one percent growth.
Some of the discrepancy between the two markets may be due to tight credit—reported by NAR’s commercial practitioners as having been unreasonably tight. Some of the discrepancy between the markets may be due to location and usage, with smaller buildings having very different characteristics than larger Class A office space in central business districts.
More information on commercial real estate markets can be accessed at: http://economistsoutlook.blogs.realtor.org/2015/04/30/small-commercial-real-estate-market/.
For more information, please visit http://www.realtor.org/research-and-statistics/.
- Job gains were solid in April. But the wage growth remains stuck and not matching up with the rises in rents and home prices. Nonetheless, more jobs even with slow wage growth means continuing support for housing demand and rising demand for commercial real estate leasing activity.
- Here are the numbers in detail:
- 223,000 net new jobs in April
- 2.98 million net new jobs in the past 12-months
- Nearly 12 million net new jobs from the cyclical low point from 2009
- The unemployment rate fell to 5.4 percent (the lowest since May 2008)
- Even with the job gains, however, there are fresh sets of college and some high school graduates looking for work. Not all are finding jobs. The employment rate remained stuck at 59.3 percent of American adults. Before the recession, 63 to 64 percent of adults were working.
- Wage growth is stuck at near 2 percent. Before the recession in 2009, wages were rising by 3.5 percent. The current wage growth therefore is not catching up with changes in housing costs. Rents are rising close to 4 percent and home prices are rising at 7.5 percent.
- The construction industry is hiring. The hard-hat construction jobs were expanded by 57,800 over the past 12 months. Moreover, the general contractor employment increased by additional 188,500 over the past 12 months. Construction is one of the better paying industries with the average hourly wage of $27.28. By comparison, workers at retail stores earn $17.32. Therefore, one quick way to boost a personal pay is to acquire skills in carpentry, bricklaying, and other construction related jobs.
- Job growth could slow in few months. Why? Labor productivity was negative for the past 6 months. The jobs momentum could slow from current 3 million net new jobs in 12-months to around 2 million net new jobs.
- As the nation celebrates the victory over evil in the Second World War, we should note the special work experience of the Greatest Generation (as coined by Tom Brokaw). They suffered the unemployment and hunger during the Great Depression. They went to Europe and islands across the Pacific Ocean to fight and win the war. Many women worked outside of home for the very first time. They then after the war worked to build the American economy into an unmatched superpower status.
Based on information in NAR’s Commercial Real Estate Market Trends report one can conclude that small commercial real estate (SCRE) markets (properties less than $2.5 million) are distinctly different from large commercial real estate markets (LCRE), where properties exchange hands for over $2.5 million.  NAR has estimated that the commercial market for buildings selling for under $2.5 million could be in the neighborhood of $50 billion annually, compared to the market for large buildings—which has averaged $360 billion and above in recent years.
Property fundamentals also seem to diverge along valuation lines. In 2014 REALTORS® reported that vacancy rates in the SCRE markets were mixed across property types. For apartments, the national average vacancy rate rose to 6.8 percent (compared to rates in the 4.0 percent level for LCRE properties). Office vacancies declined to 14.9 percent (roughly comparable to LCRE markets), while industrial availability rose to 11.6 percent (compared to approximately 9.0 percent for LCRE properties). Retail availability decreased to 12.5 percent (compared to 9.7 for LCRE properties). Overall, the vacancy rates pointed out that in SCRE markets the recovery in leasing activity was slower than in the LCRE markets.
In terms of capital availability, the divergent trends continued. REALTORS® reported that in SCRE markets, the main sources of commercial real estate funding came from local and regional banks. In comparison, the LCRE segment was broadly diversified, with representation from government agencies (Freddie/Fannie), insurance companies, national banks, REITs, commercial mortgage backed securities, private investors and cross-border funds.
LCRE markets appear to focus to a significant degree on central business district office and retail properties as well as large properties in the suburbs. In comparison, REALTORS® reported a significant level of warehouse and suburban office sales.
Based on the recent release of the Federal Reserve, the net worth of households and nonprofits rose to $82.9 trillion during the fourth quarter of 2014. This is an increase of $4 trillion from one year ago and $26 trillion compared to the lowest net worth level in 2008. But how is this net worth distributed by U.S. households at the local level?
In 2013, the national median inflation-adjusted family net worth – the difference between families’ gross assets and their liabilities – increased only in the upper – middle income tiers of households (the top 40 percentile of income) compared to 2010. This increase eased the net worth gap between the top 10 percentile income tier and the top 20 percentile from 4.2 to 3.8 multiples. The gap narrowed also with the top 30-40 percentile income tier from 9.3 to 7.1 multiples. In contrast, the net worth gap increased between the top 10 percentile income tier and the middle, middle – low income tiers. For example, the gap widened between the top 10 percentile and the middle – low income group (top 60-80 percentile) from 46.7 to 50.5 multiples.
Real estate markets, which contribute the value of property to net worth, slowly began to recover from 2010. Specifically, home prices rose in 84% of the 100 largest metro areas. Data show that homeowners have steadily recovered and built housing wealth as a result.
However, the homeownership rate declined in 93% of those metro areas. Hence, the rising housing wealth goes to fewer people as the number of homeowners has fallen while the number of renters has risen. Based on Federal Reserve data, the typical homeowner’s net worth in 2013 was 36 times greater than that of renters. Here is the net worth for Homeowners and Renters for the period 2010 – 2015 estimate.
Although it is difficult to assess the true level of wealth inequality in markets at the metro level, inequality can easily be identified as intensifying or lessening by simply measuring the change in the number of owners and renters at a time when values are rising. Analyzing Census data, Bakersfield, Richmond, Toledo, Orlando and Tampa were found to have experienced the largest decline in homeownership rate among the 100 metro areas. For instance, based on the table above, a typical homeowner in Orlando gained $31,500 in housing wealth from 2010. However, the homeownership rate in Orlando declined by 4.3%. This means that fewer people received that housing wealth increase to their net worth. Therefore, it is easy to infer that Orlando has become more unequal as the number of homeowners has fallen.
The inability for renter households to become homeowners is leaving them behind financially. A typical homeowner’s net worth climbs because of upticks in home values and declining mortgage balances over time. On the other hand, renters have likely seen increased housing costs and are less likely to have been active investors in the stock market’s strong growth in recent years.
Additionally, most metro areas also showed intensifying income inequality. While both are important to understanding inequality, wealth is different from household income. Wealth is the difference between the value of a family’s assets (money in bank account, value in property, etc.) and liabilities (debts). On the other hand, household income measures the annual inflow of wages, interests, profits and other sources of earnings. Income inequality is measured by the Gini Index (U.S. Census Bureau). Data showed that most of the metro areas with high Gini index had also low homeownership rates (Los Angeles, New York, San Francisco, San Diego). Based on the negative relationship of wealth inequality and the homeownership rate above, it seems that those metro areas with higher income inequality were also associated with greater wealth inequality.
According to the visualization above, Los Angeles, New York, Fresno (CA), San Diego and San Francisco can be inferred to have the most unequal wealth distribution as a result of their low homeownership rates.
Comparing the Gini index level between 2010 and 2013, data also show that 93 out of the top 100 metro areas experienced a rising Gini Index, which also means rising income inequality. Bridgeport (CT), New York, Miami, New Orleans and Los Angeles were found to have the highest income inequality in 2013.
Based on the above analysis, the decline in homeownership appears to have serious implications for our economy and is currently leading to a more unequal America. Although better economic conditions should eventually open the door for more prospective buyers, improving access to mortgage products to creditworthy borrowers and ramping up new home construction – especially to entry-level buyers – will help ensure the opportunity is there for more American households to enjoy the potential wealth benefits and long-term stability homeownership provides.
 The Change of Wealth includes the change in median home prices for single family homes (2010 – 2013) and an estimate of principal accumulated. Principal is estimated using a 30 – year mortgage and assuming that the homebuyer finances 80% of a median – priced home.
 Gini Index measures the extent to which the distribution of income among households within an area deviates from the perfectly equal distribution. A Gini index of 0 represents perfect equality, where all households have equal income. A value of 1 implies perfect inequality, where only one household has any income. Thus, the higher the Gini index, the higher income inequality in the metro area. Similarly, the higher the positive change in Gini index, the more income inequality has increased in the metro area. Areas with negative change in Gini index have seen income inequality decline.
- American workers have become less productive in the past two quarters. A sizable number of new workers were added to the payroll yet overall production barely increased. So production per person declined. Without rising worker productivity many bad things can happen to the economy – including a faster rise in mortgage rates.
- More detail on the numbers: In the first quarter, productivity fell at a 1.9 percent annual rate, following a 2.1 decline in the prior quarter. There have not been 2 consecutive quarters of decline in over 20 years. Since this time last year, productive is only barely positive with each worker producing 0.48 percent more for each hour or work. The 3.2 million net new hires over the past 12 months have not meaningfully pushed up GDP. The historical productivity growth rate in the U.S. has been around 2 percent per year. In the past four years, productivity has been disappointingly low with less than 1 percent growth.
- Is it a big deal whether it rises at 1, 2 or 3 percent? Definitely! Faster worker productivity means
- faster worker wage increases
- faster economic and tax revenue growth
- lower consumer price inflation, and
- lower mortgage rates, among many other beneficial effects. If productivity was to rise at 1 percent then the standard of living would double in about 70 years (that is, grandchildren will have twice as many things as their grandparents). If productivity was to rise at 3 percent then the standard of living would double in 24 years (that is, children will have twice as many things as parents).
- Due to disappointing productivity figures of late, expect companies to scale back hiring decisions and be stubborn about giving raises. Also inflation, which had been non-existent, could slowly increase and, consequently, pressure mortgage rates to rise a bit.
- Some say, because of the service nature of our economy, with less manufacturing the productivity growth will be more challenged in upcoming years. However there are many examples of where even a person facing physical handicap can raise productivity. Many wounded soldiers become productive citizens in software development, teaching, financial planner, and a multitude of other professions that are knowledge-based and not necessarily physical. One long ago example was of a young man who lost a hand from a factory accident. He then went to work doing minor tasks at a local drug store. Then an idea popped in his head: why not turn a drug store into a convenient place to buy other things? Mr. Walgreen went on to make a fortune even with a physical handicap because he greatly boosted retail store productivity.
Cash sales appear to be on the downtrend, according to the March 2015 REALTORS® Confidence Index Survey. Cash sales accounted for 24 percent of total existing home sales in March 2015 and have been hovering at this mid 20’s compared to about 30 percent in 2013.
The decline in cash sales is related to the drop in buying activity by investors, given fewer distressed sales on the market and rising prices. Sales for investment purposes fell to 14 percent in March 2015 from about 20 percent in 2014 while distressed sales accounted for 10 percent of existing home sales.
The declining share of sales for investment purposes and cash sales indicates that long-term homeowners, rather than investors, are increasingly driving the recovery.
First-time homebuyers made up 30 percent of existing home sales in March 2015, at par with past months’ levels (29 percent in February 2015; 30 percent in March 2014) according to the March 2015 REALTORS® Confidence Index Survey. 
Recent measures to make mortgages more affordable and credit more available for first-time buyers (e.g., lower FHA mortgage insurance, 3 percent down payment GSE-backed loans, and relaxation and clarity regarding lender buyback of loans they originate) were reported to be helping homebuyers get back into the market.
 First time buyers accounted for about 33 percent of all homebuyers based on data from NAR’s 2014 Profile of Home Buyers and Sellers (HBS). The HBS is a survey of primary residence homebuyers and does not capture investor purchases but does cover both existing and new home sales. The RCI Survey is a survey of REALTORS® about their transactions and captures purchases for investment purposes and second homes for existing homes.
- Utah, Florida, and Pacific Ocean states of Washington, Oregon, and California are rolling along in jobs. Given clear linkage between jobs and home sales, REALTORS® in these states should expect busy activity.
- North Dakota and Texas, which had consistently been ranked in top-five in recent years, are sliding down the poll. North Dakota fell to #7 while Texas slid to #12. Reason: low oil prices.
- Only West Virginia had fewer jobs this March versus one year ago. Aside from the Mountaineers, the slowest growing states were Mississippi, Maine, Montana, and Alaska. REALTORS® in these states should be cautious.
- Only 15 states experienced a strengthening job market condition in the latest. The 35 remainder states experienced a weakening condition. Utah, for example, still creates jobs at a fast pace of 4.0 percent in the past 12 months to March, but that is slower compared to 4.3 percent pace in February.
- At the metro level, job creation is the fastest in the following markets over the 12-months. Some of the below markets are quickly decelerating, like Midland; while others are accelerating, like Savannah. The only big market in this top-ten metro list is San Jose. If you are not a homeowner in San Jose, you can expect to live in another city next year since rents are also rising super fast.
- Aside from the one year trend, it is worth noting of very long term patterns. The Baltimore metro area, which includes the surrounding counties, has been creating jobs at the respectable pace. Not so for Baltimore City itself. There had been nearly ½ million jobs in the city 30 years ago but now has shrunk to 364,200 job in the most recent months. At the other end, Las Vegas has been high flyer where jobs have gone from 200,000 to 897,600 in March over the same period. Nevada jobs in the long past were in silver mining (as in Mark Twain’s Roughing It). After that run, there was nothing in the state other than desert and therefore jobs declined for a long period. Then the state became creative: it manufactured divorces and marriages. Forget the long wait time, Nevada promoted an instant change from misery to bliss round-the-clock. The state also took advantage of allowing boxing when other states started to prohibited it. The spectators cannot simply watch two men beat each other up; they also need to bet money.
REALTORS® were increasingly more confident about the outlook for all property types in the next six months, according to the March 2015 REALTORS® Confidence Index Survey.
For the second month in a row, the index rose above 50 for all property types. In the single family market, the REALTORS® Confidence Index - Six-month Outlook stayed at 75 (75 in February 2015; 69 in March 2014). The index for townhomes rose to 56 (55 in February 2015; 51 in March 2014), while the index for condominiums increased to 51 (50 in February 2015; 49 in March 2014). An index greater than 50 indicates that the number of respondents with “strong” outlook outnumbered those with “weak” outlook.
The seasonal uptick in market activity during spring and summer, low interest rates, and recent measures to help first-time homebuyers such as the lowering of FHA mortgage premiums and down payment requirement for GSE-backed loans appear to be increasing interest from first-time homebuyers.
In a monthly REALTORS® Confidence Index Survey, NAR asks REALTORS® “For the last house that you closed in the past month, how long was it on the market from listing time to the time the seller accepted the buyer’s offer?”.
The map below shows the median days on market of respondents about their sales from January 2015-March 2015. Properties sold typically within 45 days in the West Coast states of California, Oregon and Washington whose economies are being fueled by the booming technology start-ups. Properties also typically sold within 45 days in North Dakota, Texas, and Louisiana, which appear to be weathering the slump in oil prices. All real estate is local. State-level data is provided for REALTORS® who may want to compare local markets against the state and national summary.
This blog post was written by Jed Smith, Managing Director, Quantitative Research and George Ratiu, Director, Quantitative & Commercial Research
NAR’s Commercial Real Estate Market Trends report summarizes sales and rental activity based on a quarterly survey of commercial REALTOR® practitioners. A second report, NAR’s yearly Commercial Lending Survey report provides information on commercial real estate financial issues addressed by REALTORS®. Both reports present commercial real estate information generally not available elsewhere: the average commercial transaction size in markets served by REALTORS® has been reported as in the neighborhood of $1.6 million, significantly below the $2.5 million threshold typically used by major databases in providing information on commercial transactions. Although many REALTORS® participate in transactions above the $2.5 million threshold, in general REALTORS® report that they serve a segment of the commercial real estate market for which data are generally not reported—Small Commercial Real Estate transactions (SCRE) under $2.5 million, in contrast to Large Commercial Real Estate transactions (LCRE) over $2.5 million.
Size of the Commercial Market
Commercial space is heavily concentrated in large buildings, but large buildings are a relatively small number of the overall stock of commercial buildings. Based on Energy Information Administration data approximately 72 percent of commercial buildings, accounting for 20 percent of commercial floor space are less than 10,000 square feet in size. An additional 8 percent of commercial buildings, accounting for approximately 9 percent of commercial space are less than 17,000 square feet in size. Most of these buildings would typically sell for under $2.5 million. The buildings provide the types of commercial space that the average American encounters on a daily basis—e.g., strip shopping centers, warehouses, small offices, supermarkets, etc. These are the types of buildings that are important in local communities, and REALTORS® are appearing to be quite active in serving these markets.
In short, the commercial real estate market is bifurcated, with the majority of buildings (81 percent) relatively small (SCRE), but with the bulk of commercial space (71 percent) in the larger buildings (LCRE). Data are readily available for transactions in excess of $2.5 million; however, there is in general a lack of data for smaller transactions—many of which are handled by REALTORS®. For example, the Urban Land Institute has reported an average yearly volume of commercial sector transactions for 2012-14 at approximately $360 Billion; however, this estimate appears to exclude much of the 28 percent of SCRE commercial space located in relatively small buildings.
Data for a precise estimate of the level of sales associated with SCRE are unavailable. The commercial real estate sector lacks the equivalent of a residential Multiple Listing Service. The limited information available leads to the conclusion that SCRE commercial buildings tend to sell for significantly less per square foot than do larger buildings. Arbitrarily assuming a 50 percent price discount relative to large buildings along with the assumption that smaller buildings turn over at a lower rate, one could estimate yearly sales for SCRE to be in the neighborhood of $50 – $70 Billion annually.
Some Comparisons: Small vs. Large Commercial Real Estate Sectors
Based on NAR’s Commercial Real Estate Market Trends one can compare the two market segments—SCRE properties valued below $2.5 million vs. LCRE properties valued above $2.5 million:
- Sales: In 2014 REALTORS® reported SCRE commercial sales volume up 10% from a year ago for the less than $2.5 million sector. In comparison, data for the LCRE segment showed a sales volume increase of approximately 17 percent for 2014 vs. 2013. The contrast between the two markets is sharper when taking into account a longer time horizon, and it underscores the post-recession difficulties experienced in sales of smaller buildings and buildings located in secondary/tertiary markets. Over the 2009-14 period, sales volume for LCRE markets averaged 35 percent growth. For the same period, sales volume in SCRE markets averaged a negative one percent growth.
- Prices: REALTORS® reported that commercial sales prices increased 4% year-over-year during 2014. Data for the LCRE market segment indicated an overall weighted average of transaction price increase of approximately 7 percent. Taking a longer horizon approach, the differences in price growth remain wide apart. Averaging year-over-year price growth rates for the two markets during the 2009-14 period illustrates the steep decline in valuations for assets in the SCRE markets. Even with the recovery of the past two years, sales prices in the SCRE markets from 2009 to 2014 are still down 7.6 percent. Prices in the LCRE markets are up 1.1 percent.
- Cap Rates: REALTORS® reported that SCRE cap rates averaged 8.0 percent during Q4.14. Data for the LCRE segment for recent cap rates averaged 7 percent. Whereas steady cap rate compression characterized the past six years in major markets, capitalization rates in SCRE markets exhibited higher volatility. Moreover, data from SCRE markets clearly display the yield premium associated with secondary/tertiary markets. Averaging the cap rates in LCRE markets over the 2010-14 period, results in a 4-year cap rate of 6.9 percent. Applying the same procedure to data from SCRE markets, produces a 9.4 percent yield.
- Vacancy Rates: REALTORS® reported that vacancy rates in the SCRE markets were mixed across property types. For apartments, the national average vacancy rate rose to 6.8 percent (compared to rates in the 4 percent level for LCRE properties). Office vacancies declined to 14.9 percent (roughly comparable to LCRE markets), while industrial availability rose to 11.6 percent (compared to approximately 9 percent for LCRE properties). Retail availability decreased to 12.5 percent (compared to 9.7 for LCRE properties). Overall, the vacancy rates showed that at the SCRE end of the markets were somewhat slower than was the case for buildings at the LCRE segment.
- Loan Availability: REALTORS® reported regional and local banks as major sources of mortgage money. In comparison, the LCRE segment focuses heavily on insurance companies, national banks and commercial mortgage backed securities for mortgage availability.
- Sales Composition: REALTORS® reported a significant level of warehouse and suburban office sales; in comparison, the compiled data for LCRE properties indicates more of a focus on central business district and retail properties.
- International Sales: Approximately 18 percent of REALTORS® reported having international commercial clients, substantially greater than the approximately 9 percent of international sales generally reported for larger buildings. On an anecdotal basis, some REALTORS® involved in international sales also report being engaged in commercial sales—generally small apartment buildings, possibly accounting for some of the discrepancy.
The bulk of commercial space appears to consist of small buildings, the SCRE commercial segment for which many REALTORS® have reported transactions. Some REALTORS® report working on sales of larger transactions, but the majority of REALTORS® appear to be focused on serving the enterprises in their local communities—the types of businesses and places visited daily.
Sales and price growth have been lower for the smaller types of buildings in comparison to buildings valued in excess of $2.5 million. Rental rate growth has, however, exceeded that of larger buildings, possibly due to the use of shorter term leases and the location of properties in secondary and tertiary markets, where recent economic growth may have had a greater impact than has been the case in primary markets. For properties under $2.5 million the major sources of financing have been in local, community, and regional financial institutions.
 Anita Kramer, ULI Real Estate Consensus Forecast, April 2015, Center for Capital Markets and Real Estate.
- The latest GDP growth rate was next to nothing. Without GDP, job growth and home sales will come to a halt. Luckily, the weak growth in the first quarter appears to be a one-off event. The upcoming GDP numbers will be improving.
- The first quarter GDP growth rate was 0.2 percent. After a couple of awesome growth rates of near 5 percent in the middle of last year, the economy is fizzling out. In the latest, a decent gain from consumer spending (2 percent growth) was offset by a sizable decline in construction of commercial buildings. Exports fell due to a strong dollar while imports rose.
- Going forward, construction of commercial buildings will pick up for the simple reason that commercial vacancy rates are falling and rents are rising. In addition, there will be a growth in residential construction because there is a housing shortage. The trade deficit worsened, partly from a weaker global economy and partly from the stronger dollar. This trade deficit situation may not get better in the near term. Spending by the federal government was steady, but spending by state and local governments declined mysteriously, even though tax revenue has been rising. Expect more outlays by state and local government going forward.
- The GDP growth forecast is for 2.7 percent in the second quarter, and then 3.0 percent for the remainder of the year (plus/minus few decimal points). For the year as a whole, GDP will likely have expanded by 2.3 percent. That will be enough to generate 2 million net new jobs for the economy.
- Some quarters are awesome and other quarters are not. There is no consistency. In fact GDP growth on an annual basis has been underperforming for nine straight years compared to U.S. norm (GDP growth of less than 3 percent for nine consecutive years). Had the economy growth at just 3 percent historical average then a typical American would have about additional $5,000 in income. Another aspect of faster GDP growth is that it shakes thing up with greater upward economic mobility. Slow economic growth leads to stagnation of the rich people staying on top while the poor people staying on bottom. China’s much faster economic growth is the reason why it is able to crank out new millionaires from people who had in the past been in poverty.
Interesting Presentation by Dr. Michael Fratantoni This Friday
The REALTOR® University Speaker Series sponsors presentations by noted economists, demographers, and social scientists on real estate and economic topics of interest to REALTORS® and others involved with residential and commercial real estate and related professions. Presentations are generally held at NAR’s Washington, DC office at 12:00 p.m. ET (although in some cases times may vary). These presentations are open to the public on a complimentary basis, and are accompanied with a light lunch.
Recent speakers have included Laurie Goodman (Urban Land Institute), Stephen Goss (Social Security Administration) and Christopher Leinberger (George Washington University).
The presentations are also available via complimentary webinar to out of town guests. Register here for the webinar.
Presentation content varies and attendees can find information on a diverse selection of real estate topics. These sessions can appeal to a variety of audiences:
- REALTOR® University students enhancing their capabilities
- State and local associations for staff training
- Brokerages providing education to participating staff
- University classes on real estate
- Members of the general public
This week’s presentation is by Dr. Michael Fratantoni, Chief Economist and Senior Vice President for Research and Industry Technology, Mortgage Bankers Association. The presentation is on Friday, May 1, from 12:00-1:00 p.m. at the NAR Washington, DC office, 500 New Jersey Avenue, NW. Dr. Fratantoni will discuss recent trends, issues, and the outlook for mortgage originations especially for first-time homebuyers in light of the regulatory changes under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
It’s not too late to sign up to attend in person or via Webinar: all are welcome. If you need additional information you can email (firstname.lastname@example.org).
- The seasonally adjusted homeownership rate fell for the 7th consecutive quarter to 63.8% in the 1st quarter of 2015, the lowest level in more than two decades. Homeownership peaked at 69.4% in the 2nd quarter of 2004.
- The sharpest declines in homeownership over the last five quarters were concentrated in millennial and gen-X age categories; under 35 (likely 20 to 35) and 35 to 44 years, respectively.
- Ownership amongst African Americans and Hispanics fell 1.4% and 1.7%, respectively, while White ownership eased 0.9% over this period.
- Regionally, both the South and Northeast dropped sharply on a year over year basis, but relative to the 4th quarter, ownership in the Northeast fell a sharp 0.8% likely a result of increased seasonal foreclosure liquidation activity that has been concentrated in a handful of judicial states.
- Though the foreclosure backlog has fallen significantly from its peak, it remains historically elevated and will result in additional transitions from ownership in the coming quarters that will weigh on the ownership rate.
- First time buyers can increase the ownership rate, but their share remains low and will remain low until demand side issues and credit access improve. Return buyers are on the rise, though, and are estimated by NAR Research to add 1.5 million new owners to the market over the next five years, which could help to ameliorate the effect of continued transitions out of ownership.
- The steady decline in ownership has directly contributed to the sharp decline in rental vacancy, which inched up 0.1% to 7.1%, the 2nd lowest rate in more than a decade. In turn, rent growth as measured by the consumer price index grew 3.5% over the 12-month period ending in March of 2015, outpacing owner’s equivalent rent growth of 2.7% over this same period. A trend that has held for several years making it more cost effective to own than rent in many housing markets.
The American Community Survey produces data regarding the housing market at zip code, metro area and state level. As we await the release of the 2014 data from US Census Bureau, let’s take a look at the period from 2009 – 2013. The visualization below presents the following financial characteristics of housing at those three (zip code, metro, state) geographic levels:
- Median Home Value,
- Median Household Income,
- Median Monthly Housing Cost with/without mortgage,
- Median Real Estate Taxes with/without mortgage,
- Median Gross Rent.
The visualization also allows you to compare the financial characteristics of housing for each zip code with those of the metro area and state where they belong to.
From a sample of 32,981 zip codes, here is a summary of the zip codes/metro areas/states with the highest values of the above financial characteristics of housing. Check if your zip code is included in the lists below.
Zip Code Level
The zip codes in the following table had the highest median home value ($1,000,000+) (Table 1), median monthly housing cost with mortgage ($4,000+) (Table 3), median real estate taxes with mortgage ($10,000+) (Table 4) and median gross rent ($2,000+) (Table 5). (Click the hyperlinks for tables for individual variables).
Top Zip Codes for Median Housing and Rent Costs:
Zip CodeMetro Area
90265, 90210, 90272, 91108, 92657Los Angeles-Long Beach-Santa Ana, CA
07620, 10018, 10282, 10577, 11765New York-Northern New Jersey-Long Island, NY-NJ-PA
92067San Diego-Carlsbad-San Marcos, CA
94027, 94028, 94920San Francisco-Oakland-Fremont, CA
94022, 94024, 94304, 95070San Jose-Sunnyvale-Santa Clara, CA
However, we see that none of the above zip codes is included in the list with the highest median household income ($250,000+) (Table 2). Please see below for the zip codes where the median household income is greater than $250,000.
Top Zip Codes for Median Household IncomeZip Code Metro Area 77010 Houston-Sugar Land-Baytown, TX 97028 Portland-Vancouver-Beaverton, OR-WA 07970 New York-Northern New Jersey-Long Island, NY-NJ-PA 21405 Baltimore-Towson, MD 95053 San Jose-Sunnyvale-Santa Clara, CA 98050 Seattle-Tacoma-Bellevue, WA
Metro Area Level
- Highest median home value:
- San Jose-Sunnyvale-Santa Clara, CA ($636,900)
- Highest median housing income:
- San Jose-Sunnyvale-Santa Clara, CA ($90,962)
- Highest median monthly housing cost (with mortgage):
- San Jose-Sunnyvale-Santa Clara, CA ($3,025)
- Highest median real estate taxes (with mortgage):
- New York-Northern New Jersey-Long Island, NY-NJ-PA ($7,201)
- Highest median gross rent:
- San Jose-Sunnyvale-Santa Clara, CA ($1,558)
- Highest median home value:
- Hawaii ($503,100)
- Highest median household income:
- Maryland ($73,538)
- Highest median monthly housing cost (with mortgage):
- New Jersey ($2,453)
- Highest median real estate taxes (with mortgage):
- New Jersey ($7,301)
- Highest median gross rent:
- Hawaii ($1,380)