Economic activity remained positive in the fourth quarter of 2011, driven by increased consumer and business spending. With employment showing signs of improvement, the outlook for commercial real estate points to a positive year.
Economic Activity
Based on the Bureau of Economic Analysis’s second estimate, gross domestic product (GDP) rose 2.8 percent in the fourth quarter. Consumer spending provided a much-needed boost to the year-end tally. The other components of GDP – business spending, net exports and government expenditures – were either weak or negative.
Following barely positive advances throughout the year, consumer spending rose 2.0 percent in the last quarter. Spending on goods outpaced spending on services by a wide margin. Consumers focused their dollars on durable goods, which gained 14.8 percent. With the average age of U.S. vehicles on the road reaching record highs, it was not surprising that sales of vehicles jumped 37.7 percent. Consumers also upped their spending on furniture, household and recreational vehicles by 8.6 percent and 9.8 percent, respectively. In the nondurable goods category, purchases of clothing and shoes propped up the holiday sales, rising 3.0 percent.
Business investments posted the weakest rate of growth in two years, advancing only 1.7 percent during the fourth quarter. While spending on equipment and software remained steady at 5.2 percent, spending on structures declined 7.2 percent. Companies continued investing in industrial equipment (up 20.3%), computers and peripherals (up 23.9%), software (up 5.7%) and transportation equipment (up 7.7%). Trade remained a bright spot during the fourth quarter, as both exports and imports increased by 4.7 percent and 4.4 percent, respectively.
Government spending – the other major component of GDP – declined 4.6 percent, due to budget cuts at the federal, state and local levels. At the federal level, defense cuts of 12.5 percent outweighed increases in non-defense spending. Squeezed by lower revenues, state and local governments continued to slash spending for the sixth consecutive quarter.
Employment
Employment closed the year on an upbeat note. After the weak showing of the third quarter, the fourth quarter of 2011 recorded a net 447,000 payroll jobs added to the economy. The bulk of that gain came during December, when private businesses added 220,000 positions. Over the quarter, private service-providing industries accounted for 437,000 of total jobs created. In a positive development for commercial real estate, professional and business services gained 141,000 jobs, education and health added 109,000 jobs, while information, financial activities and leisure/hospitality industries contributed an additional 95,000 jobs.
The trends were also mirrored in the figures for first-time unemployment insurance claims, which broke through the 400,000-per-week floor in November. In addition, the number of people drawing unemployment benefits steadily declined over the quarter toward 3.6 million (it was 4.2 million during the fourth quarter 2010). The unemployment rate dropped from 9.0 percent in September to 8.5 percent in December.
In light of the broader trends, consumers embraced the end of 2011 with a cautious sense of optimism. The two main measures of consumer confidence and sentiment both showed improvements in the last three months of the year. The consumer confidence index compiled by the Conference Board—a measure that considers respondents’ general feelings about the job market and their finances—increased from 40.9 in October to 64.8 in December. Meanwhile, the University of Michigan survey of consumer sentiment also increased during the fourth quarter, from 60.8 in October to 69.9 in December.
Commercial Sales
The latest data from Real Capital Analytics shows that during 2011, more than 13,000 major properties traded hands, totaling $205.8 billion in sales. In fact, investment in commercial real estate increased with each successive quarter last year: from $35.1 billion in sales during the first quarter of 2011, to $51.3 billion in the second quarter, $54.3 billion in the third quarter and $65.0 billion in the final quarter. The annual figure represents a 51 percent increase from 2010.
The significant shift in commercial investment activity came amid increased availability of capital at the high end and changing preferences of global investors. With corporate profits at record highs, major economic centers like Washington, D.C., New York, Boston and San Francisco became attractive investment targets. In addition, with declining cap rates for trophy properties, investors turned their attention towards stable secondary markets, where returns proved more appealing.
The fourth quarter retained the bifurcation in commercial markets along property values. Smaller size investments and businesses continued to struggle with lack of capital and access to financing. Based on the Realtors Commercial Real Estate Market Survey, members remained primarily concerned about financing as the main obstacle to a broad market recovery.
Outlook
The fourth quarter data points to an upturn in commercial real estate, supported by broad economic recovery. Improving demand is expected to strengthen fundamentals, especially for the multifamily sector. Investment activity is projected to advance as available capital continues to unfold in search of returns.
For the Commercial Real Estate Outlook report, visit http://www.realtor.org/research/research/commercialhome.
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