by Calculated Risk on 10/04/2018 11:59:00 AM

Reis reported that the vacancy rate for regional malls was 9.1% in Q3 2018, up from 8.6% in Q2 2018, and up from 8.3% in Q2 2017. This is down from a cycle peak of 9.4% in Q3 2011, and up from the cycle low of 7.8% in Q1 2016.

For Neighborhood and Community malls (strip malls), the vacancy rate was 10.2% in Q3, unchanged from 10.2% in Q2, and up from 10.0% in Q3 2017. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011, and the low was 9.8% in Q2 2016.

Comments from Reis:

Following months of announcements, a number of Sears and Bon-Ton stores closed their doors in the third quarter pushing the mall vacancy rate to 9.1% from 8.6% in the second quarter and a low of 7.8% in the fourth quarter of 2016. It had earlier peaked at 9.4% in the third quarter of 2011.

The jump in vacancy does not account for a number of owner-occupied Sears and Bon-Ton stores that also closed but are not included in the Reis for-rent mall inventory. While we are tracking all of the closures, we only aggregate the stores that are for-lease in our vacancy and rent numbers.

The average rent at malls declined 0.3% to $43.25 per square foot in the third quarter. Rent growth had been sluggish over the last few quarters but had remained positive. In 10 years, the average mall rent has cumulatively grown 6.5% from $40.62 per square foot in Q3 2008, which was the peak rate in the last cycle.

For the neighborhood and community shopping center sector, the vacancy was unchanged at 10.2% after climbing 20 basis points in the second quarter from 10.0% where it had held steady for four straight quarters. The national average asking rent increased 0.4% in the third quarter as did the effective rent which nets out landlord concessions. At $21.11 per square foot (asking) and $18.48 per square foot (effective), the average rents have increased 1.7% and 1.8%, respectively, since the third quarter of 2017.
…
Conclusion
The third quarter saw the brunt of the big department store closings as the vacancy jumped due to Sears and Bon-Ton stores. Our numbers show that more owner-occupied Sears stores closed than for-lease stores which are accounted for in our statistics, yet more of the Bon-Ton stores that closed were leased and thus were included in our statistics. Only time will tell if the significant closings in the third quarter will affect other tenants in malls and shopping centers. Some landlords have indicated that they have redevelopment plans underway for these closed stores which could stave off further vacancies.

As for the neighborhood and community shopping center numbers, we had reported last quarter that most of the Toys “R” Us stores closed in the second quarter and that things would settle this quarter which proved to be accurate. We still believe that most of the negative net absorption is behind us. Although, we do not expect the vacancy rate to improve significantly in the near future, nor do we expect rent growth to increase above the lackluster rates seen over the last few quarters.

In short, the retail sector is still correcting. The growth of e-commerce has rendered a number of older retailers obsolete. Other retailers have survived only after developing an omni-channel approach to selling that includes an online presence. Proprietors that have added entertainment options and/or overhauled food and restaurant offerings to their properties have helped maintain foot traffic that their tenants need to survive. While there are a few new construction projects in the pipeline, a number of obsolete shopping centers have sold as development sites. We expect to see more conversions, demolitions and major renovations as this sector continues to adapt to the changes induced by e-commerce.
emphasis added

Click on graph for larger image.

This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.

In the mid-'00s, mall investment picked up as mall builders followed the "roof tops" of the residential boom (more loose lending). This led to the vacancy rate moving higher even before the recession started. Then there was a sharp increase in the vacancy rate during the recession and financial crisis.

Recently both the strip mall and regional mall vacancy rates have increased from an already elevated level.

Mall vacancy data courtesy of Reis

by Calculated Risk on 10/04/2018 10:58:00 AM

Reis reported that the office vacancy rate was unchanged at 16.6% in Q3, from 16.6% in Q2 2018. This is up from 16.4% in Q3 2017, and down from the cycle peak of 17.6%.

From Reis Economist Barbara Denham:

Defying employment trends, the U.S. office market was flat in the third quarter at 16.6%. Once again, leasing activity remains tepid compared to previous expansions. Net absorption, or occupancy growth, was 3.54 million square feet, up from 3.48 million square feet last quarter, but down from an average of 5.9 million square feet absorbed per quarter in 2017. New completions fell to 5.93 million square feet, down from an average of 11.2 million square feet added per quarter in 2017.

Rent growth had accelerated a bit earlier in the year but fell to 0.4% in the third quarter, down from 0.7% in the second quarter. Both the average asking rent and average effective rent (that nets out landlord concessions) grew at the same rate in the quarter as they did in the prior six quarters. This suggests that landlord concessions have seen little change over the last year. One year ago, the average asking and effective rent growth was also 0.4%. At $33.20 per square foot (asking) and $26.94 per square foot (effective), the average rents have increased 2.5% and 2.6%, respectively, since the third quarter of 2017.
...
The sluggishness in the office market is nothing new, but the deceleration contrasts an otherwise healthy economy as office employment growth has picked up in 2018 from rates seen in 2017 (1.8% in 2018 vs. 1.6% in 2017). The recent higher rent growth had suggested that landlords were gaining confidence in leasing conditions, but net absorption has persistently trailed new completions over the last seven quarters as tenants have been hesitant to take on added space which has kept a lid on rent growth.

The office market statistics still reflect the gap between the haves and the have-nots: larger markets in the West, South Atlantic and larger Northeast cities with healthy occupancy and rent growth offset by tepid growth or declines in smaller, suburban markets in the Midwest or in less densely populated areas. However, the numbers show that the gap is narrowing.

We still await the announcement of Amazon’s selection for its HQ2. Will the news come before Reis releases its fourth quarter statistics? Or will the suspense kill us all.

Click on graph for larger image.

This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual).

Reis reported the vacancy rate was at 16.6% in Q3.  The office vacancy rate had been mostly moving sideways at an elevated level, but has increased slightly recently.

Office vacancy data courtesy of Reis.

by Calculated Risk on 10/04/2018 09:49:00 AM

Reis reported that the apartment vacancy rate was at 4.8% in Q3 2018, up from 4.7% in Q2, and up from 4.4% in Q3 2017.  This is the highest vacancy rate since Q3 2012. The vacancy rate peaked at 8.0% at the end of 2009, and bottomed at 4.1% in 2016.

From Reis:

The apartment vacancy rate increased in the quarter to 4.8% from 4.7% last quarter and 4.4% in the third quarter of 2017. The vacancy rate has now increased 70 basis points from a low of 4.1% in Q3 2016.

The national average asking rent increased 1.2% in the third quarter while the average effective rent, which nets out landlord concessions, also increased 1.2%. At $1,424 per unit (market) and $1,356 per unit (effective), the average rents have increased 4.5% and 4.2%, respectively, from the third quarter of 2017.

Net absorption was 35,683 units, lower than the previous quarter’s absorption of 57,988 units and below the average quarterly absorption of 2017 of 46,685 units. Construction was 50,475 units, also below the second quarter’s 67,417 units and below the 2017 quarterly average of 61,535 units.
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The apartment market had slowed at the end of 2017 and early 2018 as the housing market started to accelerate. However, the passing of the Tax Reform and Jobs Act in December that doubled the standard deduction and cut the deductibility of state and local taxes reduced the incentive to buy a home. This has helped the apartment market, especially in high-taxed localities.

We expect construction to remain robust for the rest of 2018 and in the first half of 2019 before completions drop off in subsequent periods. Occupancy is expected to remain positive, although vacancy rates are expected to increase, as new supply will outpace demand growth. Still, as long as job growth holds steady, we expect rent growth to remain positive over the next few quarters.
emphasis added

Click on graph for larger image.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.

The vacancy rate had mostly moved sideways for the last several years.  However, the vacancy rate has bottomed and is now increasing.  With more supply coming on line - and less favorable demographics - the vacancy rate will probably continue to increase over the next year.

Apartment vacancy data courtesy of Reis.

by Calculated Risk on 10/04/2018 08:33:00 AM

The DOL reported:

In the week ending September 29, the advance figure for seasonally adjusted initial claims was 207,000, a decrease of 8,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 214,000 to 215,000. The 4-week moving average was 207,000, an increase of 500 from the previous week's revised average. The previous week's average was revised up by 250 from 206,250 to 206,500.
emphasis added

The previous week was revised up.

The following graph shows the 4-week moving average of weekly claims since 1971.

Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 207,000.

This was lower than the the consensus forecast. The low level of claims suggest few layoffs.

by Calculated Risk on 10/03/2018 04:58:00 PM

Note: CR has been hiking, and is scheduled to return to posting on Thursday, Oct 4th.

Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released.

by Calculated Risk on 10/03/2018 10:03:00 AM

CR October 2018 Update: In 2013, I wrote a post "Predicting the Next Recession". I repeated the post in January 2015 (and in the summer of 2015, in January 2016, in August 2016, in April 2017, and in April 2018) because of all the recession calls. In late 2015, the recession callers were out in force - arguing the problems in China, combined with the impact on oil producers of lower oil prices (and defaults by energy companies) - would lead to a global recession and drag the US into recession.  I didn't think so - and I was correct.

I've added a few updates in italics by year.  Most of the text is from January 2013.

A few thoughts on the "next recession" ... Forecasters generally have a terrible record at predicting recessions. There are many reasons for this poor performance. In 1987, economist Victor Zarnowitz wrote in "The Record and Improvability of Economic Forecasting" that there was too much reliance on trends, and he also noted that predictive failure was also due to forecasters' incentives. Zarnowitz wrote: "predicting a general downturn is always unpopular and predicting it prematurely—ahead of others—may prove quite costly to the forecaster and his customers".

Incentives motivate Wall Street economic forecasters to always be optimistic about the future (just like stock analysts). Of course, for the media and bloggers, there is an incentive to always be bearish, because bad news drives traffic (hence the prevalence of yellow journalism).

In addition to paying attention to incentives, we also have to be careful not to rely "heavily on the persistence of trends". One of the reasons I focus on residential investment (especially housing starts and new home sales) is residential investment is very cyclical and is frequently the best leading indicator for the economy. UCLA's Ed Leamer went so far as to argue that: "Housing IS the Business Cycle". Usually residential investment leads the economy both into and out of recessions. The most recent recovery was an exception, but it was fairly easy to predict a sluggish recovery without a contribution from housing.

Since I started this blog in January 2005, I've been pretty lucky on calling the business cycle.  I argued no recession in 2005 and 2006, then at the beginning of 2007 I predicted a recession would start that year (made it by one month with the Great Recession starting in December 2007).  And in 2009, I argued the economy had bottomed and we'd see sluggish growth.

Finally, over the last 18 months, a number of forecasters (mostly online) have argued a recession was imminent.  I responded that I wasn't even on "recession watch", primarily because I thought residential investment was bottoming.

[CR 2015 Update: this was written two years ago - I'm not sure if those calling for a recession then have acknowledged their incorrect forecasts and / or changed theirs views (like ECRI and various bloggers). Clearly they were wrong.]

[CR April 2017 Update: Now it has been over four years!  And yes, ECRI has admitted their recession calls were incorrect.  Not sure about the rest of the recession callers.]

[CR October 2018 Update: Now it has been five and a half years!]

Now one of my blogging goals is to see if I can get lucky again and call the next recession correctly.  Right now I'm pretty optimistic (see: The Future's so Bright ...) and I expect a pickup in growth over the next few years (2013 will be sluggish with all the austerity).

The next recession will probably be caused by one of the following (from least likely to most likely):

3) An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable, and the probabilities are low that they will happen in the next few years or even decades.

[CR 2016 Update: The recent recession calls are mostly based on exogenous events: the problems in China and in commodity based economies (especially oil based).  There will be some spillover to the US such as fewer exports (and an impact on oil producing regions in the US), but unless there is a related financial crisis, I think the spillover will be insufficient to cause a recession in the US.]

2) Significant policy error. This might involve premature or too rapid fiscal or monetary tightening (like the US in 1937 or eurozone in 2012).  Two examples: not reaching a fiscal agreement and going off the "fiscal cliff" probably would have led to a recession, and Congress refusing to "pay the bills" would have been a policy error that would have taken the economy into recession.  Both are off the table now, but there remains some risk of future policy errors. 

Note: Usually the optimal path for reducing the deficit means avoiding a recession since a recession pushes up the deficit as revenues decline and automatic spending (unemployment insurance, etc) increases.  So usually one of the goals for fiscal policymakers is to avoid taking the economy into recession. Too much austerity too quickly is self defeating.

[CR 2017 Update: Austerity was a mistake (obvious at the time).  And it is possible that we will see serious policy mistakes from the new administration (a complete wildcard).  And it is possible the Fed could tighten too quickly. ]

[CR April 2018 Update: We are seeing policy mistakes from the Trump administration on taxes, immigrations, and trade. See: When the Story Change, Be Alert. I'm watching for the impact of these policy mistakes.]

1) Most of the post-WWII recessions were caused by the Fed tightening monetary policy to slow inflation. I think this is the most likely cause of the next recession. Usually, when inflation starts to become a concern, the Fed tries to engineer a "soft landing", and frequently the result is a recession. Since inflation is not an immediate concern, the Fed will probably stay accommodative for a few more years.

So right now I expect further growth for the next few years (all the austerity in 2013 concerns me, especially over the next couple of quarters as people adjust to higher payroll taxes, but I think we will avoid contraction). [CR 2015 Update: We avoided contraction in 2013!] I think the most likely cause of the next recession will be Fed tightening to combat inflation sometime in the future - and residential investment (housing starts, new home sales) will probably turn down well in advance of the recession. In other words, I expect the next recession to be a more normal economic downturn - and I don't expect a recession for a few years.

[CR October 2018 Update: This was written in 2013 - and my prediction for no "recession for a few years" was correct.  This still seems correct today, so no recession in the immediate future (not in the next 12 months). ]

by Calculated Risk on 10/02/2018 04:53:00 PM

CR Note: Gone hiking! I will return on Thursday, Oct 4th. See the links below for the official releases.

Wednesday:
• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:15 AM, The ADP Employment Report for September. This report is for private payrolls only (no government). The consensus is for 182,000 payroll jobs added in August, down from 219,000 added in July.

• Early: Reis Q3 2018 Office Survey of rents and vacancy rates.

• At 10:00 AM, the ISM non-Manufacturing Index for September. The consensus is for index to increase to 56.8 from 55.7 in July.

by Calculated Risk on 10/02/2018 10:01:00 AM

CR Note: Gone hiking! I will return on Thursday, Oct 4th.
In 2005 and 2006, I was researching previous housing bubble / busts to try to predict what would happen following the bursting of the housing bubble.

So, in April 2008, when many pundits were calling the housing bottom, I wrote: Housing Bust Duration

After another year (or two) of rapidly falling prices, it's very likely that real prices will continue to fall - but at a slower pace. During the last few years of the bust, real prices will be flat or decline slowly - and the conventional wisdom will be that homes are a poor investment.

The Los Angeles bust took 86 months in real terms from peak to trough (about 7 years) using the Case-Shiller index. If the Composite 20 bust takes a similar amount of time, the real price bottom will happen in early 2013 or so.

And then in February 2012 I wrote: The Housing Bottom is Here

There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices (especially if prices fall another 4% to 5% NSA between the November Case-Shiller report and the March report). Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales (the probable mortgage settlement, the HARP refinance program, and more).

And in March 2013, I wrote about the two bottoms - one for activity and the other for prices: Housing: The Two Bottoms

I pointed out there are usually two bottoms for housing: the first for new home sales, housing starts and residential investment, and the second bottom is for house prices.
...
[I]t appears activity bottomed in 2009 through 2011 (depending on the measure) and house prices bottomed in early 2012.

by Calculated Risk on 10/01/2018 04:52:00 PM

CR Note: Gone hiking! I will return on Thursday, Oct 4th.

Tuesday:
• All day Light vehicle sales for September. The BEA estimated sales of 16.596 million SAAR in August 2018 (Seasonally Adjusted Annual Rate).

• Early, Reis Q3 2018 Mall Survey of rents and vacancy rates.

• AT 8:00 AM ET, Corelogic House Price index for August.

by Calculated Risk on 10/01/2018 10:02:00 AM

CR Note: Gone hiking! I will return on Thursday, Oct 4th.
In early 2009, many analysts were predicting the 2nd Great Depression. However I started seeing some positive signs ... and I was able to call the end of the recession in mid-2009.

From January 2009: Vehicle Sales

David Rosenberg at Merrill Lynch wrote a research piece last week: "Not Your Father’s Recession ...(But Maybe Your Grandfather’s)" (no link)

Needless to say, the piece wasn't too upbeat.

But I was intrigued by some of the comments on vehicle sales.
...
Currently this ratio is at 23.9 years, the highest ever. This is an unsustainable level (I doubt most vehicles will last 24 years!), and the ratio will probably decline over the next few years. This could happen with vehicles being removed from the fleet, but more likely because of a sales increase.
...
Sales won't increase right away (look at the depressed sales during the early '80s), but this does suggest that auto sales are closer to the bottom than the top, and that auto sales will increase significantly in the future - although sales in 2009 will probably be dismal.

And from February 2009: Looking for the Sun

2009 will be a grim economic year. The unemployment rate will rise all year, house prices will fall, commercial real estate (CRE) will get crushed ... but there might be a few rays of sunshine too.
...
Even though most of the economic news will be ugly in 2009, my guess is all three of these series will find a bottom (or at least the pace of decline will slow significantly). This means that the drag on employment in these industries, and the drag on GDP, will slow or stop.

These will be rays of sunshine in a very dark season. That doesn't mean a thaw, but it will be a beginning ...

CR Note: I do not have a crystal ball, but I was looking past the horrible day-to-day numbers and starting to see the end of the recession.