U.S. WATCH
JULY 2015
News about the U.S. economy took a back seat in June. Supreme Court decisions, Charleston's tragedy, the Greek dra(ch)ma and Puerto Rico's troubles
grabbed headlines. And the economic news was largely positive and indicative of an economy on a strong footing that had a momentary lapse in Q1.
The ISM indices stayed in expansionary mode, the job market had a nice upside surprise, retail sales experienced an uptick and, best of all, the housing
market indicators boosted optimism about the sector's recovery. Fundamentals warrant a better spending profile from consumers and businesses, who
have remained stubbornly cautious despite lower energy prices and constant drumbeat of good news about improving economic indicators. There are
early signs that consumer spending is starting to catch up with consumer sentiment as wage gains begin to appear. The energy industry's pullback is also
gradually fading and business investment spending is expected to gain momentum. All signs point to continued economic expansion and raises the
likelihood of a September rate hike.
S&P 500 2063.1
-2.1%
FED FUNDS RATE 0-0.25%
10-YR. T-NOTE
2.34%
24 bps
OIL $58.34
-3.2%
Data points through end of June. Change represents month-over-month change.
1. A Slower Start For Manufacturing This Year
Institute of Supply Management
Manufacturing & Non-Manufacturing Indices
65
ISM Indices
60
55
50
45
40
Non-Manufacturing
Manufacturing
35
30
May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15
Source: Institute of Supply Management
Labor Markets
Are Strong
2.2. Mortgage
Apps FALLING
The ISM manufacturing index (light green line) came perisoulsy close to the allimportant 50 threshold earlier this year but has recovered since and continues
to signal expansion in the sector. It has notably cooled in 2015 from a
stronger second half of 2014 when it averaged a reading of nearly 57. The
index, at 52.8 in May, showed 14 of the 18 industries in the index growing.
Respondents were largely positive, mentioning an improving economy,
increased demand, and normalization of flow of goods from West Coast ports.
Manufacturing is likely to have a more modest year as the dollar has
strengthened and global demand for American goods has softened. The
Services sector of the economy, represented by the non-manufacturing index
(dark green line) has been stronger this year, with the most recent reading at
55.7. Survey respondents consistently cited confidence in the economy and
improved business conditions.
Initial Unemployment Insurance Claims
4 wk MA, Ths
Initial Jobless Claims
700
650
U.S. jobless claims held steady at 271,000 for the most recent weekly reading.
Despite some low-level modest volatility, claims continue their overall trend
downward. On a 4-week MA basis, claims are slightly elevated at 274,000
but still down 13% from a year ago. The claims are 3% above their lowest
reading in this recovery cycle, which was roughly a month ago. As the business
and consumer confidence are restored to pre-recession levels and layoffs
continue to fade from headlines, jobless claims continue to recede sharply.
The 4-week MA has consistently remained below the 350,000 mark for nearly
20 consecutive month, indicating a robust job market.
600
550
500
450
400
350
300
250
Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15
Source: Employment and Training Administration
3. Retail Spending Picks Up Momentum
Total Retail Sales & Sales Ex Autos
YoY, % Change
15%
Retail Sales
10%
5%
0%
-5%
Ex Auto
-10%
Total Retail Sales
-15%
May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15
Retail sales figures have disappointed so far in 2015 but May figures gave
some reasons for optimism. On a MoM basis, May's 1.2% gain was the third
consecutive month of gains after three months of MoM declines. There is hope
that the consumers are more optimistic as the strength of the economic
expansion has been reinforced after the West Coast port strikes, a long winter,
and the recent appreciation of the dollar. Retailers are expected to see greater
gains in the second half of the year, as consumers finally start spending some
of the savings from the lower gas prices. Continued low oil prices and an
expected uptick in wage growth should be tailwinds going forward for
consumer spending trends.
Source: U.S. Census Bureau
This information is for our clients and investors only. Please note that the content of this report is for informational purposes only and should not be
viewed as investment advice or an offer or solicitation. Any opinions are solely those of the Strategy & Research Team of CBRE Global Investors and
are subject to change without notice, and may not be consistent with market trends or future events. This research is based on current public
information that we consider reliable, but we do not represent it is accurate, updated or complete, and it should not be relied on as such.
4. Retail
Lending
Markets
Are Robust
4.
Sales
Is Softening
Net Percentage of
Domestic Respondents
Tightening Standards for CRE
Loans
100%
Reporting Stronger Demand
for CRE Loans
80%
60%
CRE debt markets remain robust, driven by increased capital flows to U.S. real
estate in a depressed interest rate environment. On balance, survey respondents
reported having eased standards. A few large banks also indicated that they had
eased standards on construction and land development loans, and some large
banks reported that they had eased standards on loans secured by multifamily
properties. Regarding changes in demand for CRE loans, modest net fractions of
banks indicated that they had experienced stronger demand for loans secured by
multifamily residential properties and loans secured by nonfarm nonresidential
properties.
40%
20%
0%
-20%
-40%
-60%
-80%
Apr-03
Apr-05
Apr-07
Apr-09
Apr-11
Apr-13
Senior Loan Officer Opinion Survey
Apr-15
Source: Federal Reserve Board
Strong Capital
Flows
YearSupply
To Date
5.5. Housing
Starts and
Months
(Billions)
$50
$40
Retail
Apartment
Industrial
Office
Investment Volume
May was the weakest month of the year and saw the least dollar volume since
March 2014. At $25.2 billion, volume was down 11% from April and 41% from
the strongest month of the year, January. Apartments saw the greatest activity
(36% of total volume), followed by office (34%). One building, 230 Park Avenue
in Manhattan, represented 15% of the total office transaction volume in May! CBD
office assets and mid/highrise apartments had cap rates hovering around 5%, the
most sough-after asset types. On a year-do-date basis, transaction volume is the
most it has been since 2007, at just over $168 billion. Capital flows are expected
to remain strong throughout the rest of 2015.
$30
$20
$10
$0
May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15
Source: Real Capital Analytics
6.6. Jobless
Claims
Caps Rates
Doing the Limbo?
10%
Spread b/w Implied Cap Rate and 10-yr Treasury (R)
Implied REIT Cap Rate (L)
Transaction Cap Rate (L)
9%
(bps)
800
700
600
Avg Spread = 337 bps ('00-'15 YTD)
8%
500
400
7%
300
200
6%
100
5%
May-09
May-10
May-11
May-12
May-13
May-14
Capitalization Rates
How low can they go? Cap rates continue to demonstrate heady pricing.
Although the implied REIT cap rate has ticked up in recent months, there is no
reason to think this is a lasting trend and, if anything, pricing will continue to get
more agressive for the near-to-mid term. However, it is a trend that bears close
watching. In May, the implied REIT cap rate and transaction cap rate were 5.54%
and 6.36%, respectively. On an absolute basis this is historically low, but taken in
the context of the current low interest rate environment, pricing can be considered
fair, based on the historical spread between the 10-year treasury and implied cap
rates.
0
May-15
Sources: Real Capital Analytics, Green Street Advisors
Superior Yields
7.7. Employment
7%
6%
S&P 500
10-Year Treasury
REITs
5%
REIT Performance
Avg REIT Div Yield
5.44% ('00-'11)
4%
3%
2%
Although total returns have trended negative year-to date, REIT dividend yield's
positive spread relative to equities and fixed income continue to be attractive.
Over the last three months, the spread relative to 10-year T-bills has averaged
151 bps, just a tad bit better than the 142 bps average since 2007. The low
interest rate environment coupled with improving NOIs and property market
fundamentals continue to make REIT dividend yields attractive. With the S&P 500
offering a 2.1% dividend yield and 10-yr Treasuries hovering in the low-2% range,
investors can still capture a yield of 4% by investing in REITs.
1%
Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15
Sources: Reuters, NAREIT
STRATEGY AND RESEARCH TEAM
Principal Contributors: Shubhra Jha • Ryan Patap
15:001-7