Gross domestic product (GDP) grew at a seasonally-adjusted
annual rate of 3.2 percent in fourth quarter 2013, following
an upwardly revised rate of 4.1 percent in third quarter,
according to the Bureau of Economic Analysis (BEA). The
stronger growth in the second half of the year raised the
growth rate for 2013 overall to 1.9 percent.
As for future economic growth, the Federal Open Market
Committee (FOMC) projects U.S. GDP to increase between
2.8 percent and 3.2 percent in 2014, with similar growth
estimates for 2015 and 2016. The International Monetary
Fund (IMF) recently forecasted future U.S. GDP growth at
2.8 percent in 2014, while global growth is expected to increase
3.7 percent in 2014.
Although there were only 74,000 new jobs added in December
2013, the unemployment rate declined to 6.7 percent
per the Bureau of Labor Statistics (BLS). The U-6 unemployment
rate, which measures labor underutilization,
was 13.1 percent, while the labor force participation rate
declined to 62.8 percent in December 2013. In comparison,
the employment to population ratio, after declining slightly
in October, increased to 58.6 percent in November and
Although the year 2013 ended without the FOMC actually
beginning to taper their monthly purchase of securities
(QE3), the Committee began paring down the amount of
their purchases by $10 billion in January 2014. In the final
meeting presided over by Chairman Ben Bernanke, the
Committee voted to reduce the amount of their purchases
by another $10 billion in February. The FOMC said they
would continue to closely monitor economic and financial
developments, and reiterated that they will continue their
highly accommodative monetary policy for a considerable
time after the asset purchase program ends and the economic
Higher consumer confidence levels were substantiated by
higher consumer spending during fourth quarter 2013. In
addition, retail sales rose 0.2 in December, following increases
of 0.4 percent in November and 0.5 percent in October
per the Census Bureau. Seasonally-adjusted retail sales
in December 2013 were $431.9 billion, which was 4.1 percent
above December 2012 sales.
The National Association of REALTORS®’s (NAR’s) pending
home sales index, a forward-looking indicator based on
contract signings, declined 8.7 percent in December 2013
from the previous month. Although existing home sales
rose 1 percent in December from the previous month to a
seasonally-adjusted annual rate of 4.87 million homes per
NAR, existing home sales have been on a downward trend
throughout the year with December being the second weakest
month of the year.
However, home appreciation remains strong, per NAR. According to the S&P/Case-
Shiller Home Price Index, home prices rose 13.7 percent in
20 cities in November 2013 on a yearly basis. On a national
level, average home prices are comparable to mid-2004 levels.
What Does This Mean for Commercial Real Estate?
It is almost surprising that commercial real estate continues to
perform as well as it does, given weak job growth and struggling
consumers in this slow-growing economy. However,
given the transparency, tangibility, and reasonable returns
associated with this asset class (as well as the fact that interest
rates are still relatively low), equity investment and lending
activity continue to increase for commercial real estate.
According to the Mortgage Bankers Association (MBA),
originations for commercial and multifamily properties totaled
$280 million in 2013, which was a 15-percent increase
from the prior year. This total was comprised of $86 billion in
commercial mortgage-backed securities (CMBS), $70 billion
in government-sponsored entity (GSE) loans, and $63 billion
in originations from life insurance companies. The MBA expects originations to increase to approximately $300 billion in 2014.
Investors noted that the availability of capital in fourth quarter
2013 was about the same as that available in third quarter
2013, and rated the availability of capital at 7.6 on a scale of 1
to 10, with 10 being high, in fourth quarter. However, investors
also noted that the discipline of capital increased at year
end, and as such, increased their rating for the discipline of
capital to 6.7 in fourth quarter 2013 (see below). This was the
third consecutive quarter in which the discipline of capital increased,
and was the highest rating since fourth quarter 2012.
Each quarter, RERC compares commercial real estate with
stocks, bonds, and cash.
Commercial real estate retained the highest investment rating among the various alternatives, despite the remarkable return performance in the stock market during fourth quarter 2013 per RERC’s institutional investment survey respondents.
While the ratings for commercial
real estate and stocks increased, the bonds rating held
steady compared to the previous quarter and the rating for
cash declined. Respondents noted that commercial real estate
retains above average yield to bonds, and that the spread will
compress in a rising interest rate environment.
The financial markets—particularly the major stock market
indices listed below—ended the year 2013 with very strong
returns. The S&P 500 posted annual returns of 32 percent,
the NASDAQ Composite had returns of 38 percent, and the
Dow Jones Industrial Average showed returns of nearly 30
percent. The yield rate on 10-year Treasurys increased to
an average of 2.7 percent in fourth quarter, while the 1-year
average was 2.35 percent. However, the property markets
also provided very reasonable returns on investment, as reflected
by the nearly 11-percent total returns reported by the
National Council of Real Estate Investment Fiduciaries (NCREIF)
Property Index and the nearly 14-percent total returns
reported by the NCREIF