Economists' Outlook

Housing stats and analysis from NAR's research experts.

Economic Growth Drives Commercial Investments in Q1 of 2013

Economic background

Economic activity maintained grew at a steady pace during the first quarter of the year, as consumers and businesses focused on the year ahead.  Gross domestic product rose 2.4 percent in the first quarter, as consumers opened up their wallets at the fastest pace since the fourth quarter 2010.  Consumer spending increased 3.4 percent in the first quarter, lifted by a 9.1 rise in auto purchases, coupled with an equal advance in sales of recreational goods and vehicles.

With aging vehicles and with manufacturers rolling out technologically advanced and more fuel efficient new models, consumers are finding new cars attractive.  Sales of cars in April totaled 651,644 units, a 3.1 percent increase year-over-year. Sales of light-duty trucks, which include SUVs, advanced 14.7 percent, benefiting from the soaring popularity of car-based cross-over vehicles, which recorded the strongest yearly gain in April, at 16.5 percent. Pick-up trucks also recorded solid sales growth, with the Ford F-Series leading the sales charts, followed by the Chevrolet Silverado.

Consumers also increased their expenditures of services—including health care, transportation, food services and lodging—by 3.1 percent, the strongest gain since the second quarter of 2005. In a sign of a broader improvement in sentiment, spending on financial services and insurance rose 7.6 percent in the first quarter, a pace not seen since the fourth quarter of 2004.

Employment figures also point to a steady pace of growth.  Payroll jobs advanced by 644,000 during the first quarter, with gains distributed fairly evenly across industries.  On a yearly basis, professional and business services, education and health and construction recorded noticeable growth.  The unemployment rate declined from 7.6 percent to 7.5 percent in March.

Businesses have also increased investments in equipment and jobs.  Business spending gained 2.1 percent in the first quarter of the year, focused on capital, equipment and software.  With international trade remaining favorable, and adding the increased domestic oil production, which led to diminishing need to import it, the balance of trade narrowed in the first quarter from $43.6 billion to $38.8 billion.

Government spending continued its decline, shrinking 5.0 percent in the first quarter, driven by budget cuts at federal, state and local levels.  At the federal level, both defense and nondefense cuts added to a 8.7 percent decrease in spending.  State and local governments slashed spending by 2.4 percent. Though negative to the economy over the short term, lowering the federal budget deficit will likely help long-term economic prospects.

The outlook for the remainder of 2013 is for GDP to grow at a 2.0 percent annual rate. Payroll employment is expected to rise 1.5 percent, as the unemployment rate remains around 7.5 percent.

Commercial Real Estate

Following on the solid 24 percent yearly gains in 2012, commercial investments notched a strong first quarter.  Sales of major properties totaled $72.8 billion in the first quarter, a 35 percent rise from a year ago, according to Real Capital Analytics.  Portfolio transactions made up a large portion of the volume, especially due to the sale of Archstone apartment properties to Equity Residential and Avalon Bay.  Individual property sales comprised $40 billion, a 7.8 percent gain from the same quarter last year.

Prices for commercial properties were up slightly in the first quarter. Cap rates inched up slightly, to an average 7.5 percent nationally across all property types, mostly due to a redirect in investments towards secondary and tertiary markets.

The rise of secondary and tertiary markets which began during 2012 has intensified during the first quarter of this year.  Faced with lower inventories of top properties in major metropolitan areas, investors have been searching for the higher yields of performing properties in smaller markets.  During the first quarter, in terms of nominal volume, New York and Washington, DC metro areas dominated the landscape, with close to $20 billion in combined sales.

However, on a year-over-year basis, the first quarter recorded 16 individual markets with triple digit gains in sales, most of them secondary markets. Jacksonville posted the strongest sales gains, up 625.2 percent, boosted by apartment and office sales.  Sales in the Virginia and Maryland suburbs of DC also jumped 295.3 percent and 199.1 percent, respectively.  The surge in sales were driven by large office and apartment property (Archstone portfolio sale) transactions in both markets.  Other markets with noticeable investment surges were East Bay, Westchester, Kansas City, San Antonio, St. Louis, and Long Island.

Source: Real Capital Analytics

The bifurcation in capital availability along property values continued in 2012 and the first part of 2013.  As data from Real Capital Analytics indicates, for deals valued at $2.5 million and above, CMBS issuers and government agencies remained dominant players in secondary and tertiary markets, followed by national banks, insurance companies and regional banks.  Meanwhile, based on data from the 2013 REALTORS® Commercial Real Estate Lending Survey, for transactions below the $2.0 million mark, private investors, local and regional banks continued to serve as the main conduits for capital liquidity.

For the Commercial Real Estate Outlook report, visit

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