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September 10, 2010

• Though consumption and retail sales have made significant headway toward recovery this year, the 6.3 percent decline in consumer credit since July 2008 will remain a drag on economic growth and job creation through the rest of 2010. Top-tier borrowers retain access to credit, but these lower-risk consumers continue to impose austerity measures as they de-leverage in the wake of the recession. At the same time, less creditworthy borrowers have been substantially cut off from credit due to high levels of lender risk aversion. As a result, tightened consumer credit will remain a headwind to the recovery as it drags on consumption. Even after credit becomes more readily available, consumption will likely continue to lag until employment and income growth improve sharply, an event not likely to occur until mid-2011.
• Total consumer credit outstanding fell 0.1 percent in July, marking the 20th monthly decline in the past 22 months. Further, a 0.5 percent drop in revolving credit, which consists almost entirely of credit card debt, fueled the overall decrease in balances outstanding. With July’s decline, revolving credit has fallen for an unprecedented 22 consecutive months, slipping by 15 percent, or $145.6 billion.
• Several factors have contributed to the decline in consumer credit. Creditworthy borrowers continue to de-leverage by paring debt and purchasing fewer goods and services on credit. Even the addition of 723,000 private-sector jobs year to date through July failed to stimulate borrowing, with revolving credit declining 4.4 percent during this period. Less qualified borrowers, including many who remain unemployed or under-employed, have been denied credit, further curtailing consumption. Compounding the issue, lenders continue to write off uncollectible balances, increasing the amount of credit card debt charged off by banks by more than 200 percent over the last two years. In the near term, only reinvigorated job growth will encourage a resurgence of lending and borrowing, but substantive hiring remains elusive.

Impact on Commercial Real Estate

• The decline in consumer credit has joined job losses, overdevelopment and worse-than-usual store closures to pressure retail properties. During the 22 months of declining revolving credit, an additional 205 million square feet of vacant space accumulated. The vacancy rate rose 200 basis points since late 2008 to 10 percent in the second quarter of 2010 and will climb another 40 basis points this year to 10.4 percent as retailers continue to adapt to the weakened retail environment.
• Tightened retailer inventories in the face of reduced consumption have impacted warehouse and distribution properties that store and transport consumer goods. Since revolving credit started to decrease in October 2008, the national industrial property vacancy rate rose 270 basis points to 12.7 percent in the second quarter of this year. Negative net absorption during that time totaled more than 166 million square feet. In 2010, declining space demand will increase vacancy 40 basis points to 13 percent on a 19.2 million square foot drop in occupied space.

August 20, 2010

• The already choppy economic recovery will continue its slow advance this year, but growth will deteriorate as its primary contributors — government stimulus and manufacturing — lose steam. Furthermore, no new economic drivers have emerged to propel the recovery into a self-perpetuating expansion, suggesting below-trend GDP growth will persist through the second half. The impact of the government stimulus on GDP growth has declined slowly since peaking in the third quarter of 2009, while the manufacturing sector, which returned to expansion mode during the third quarter of last year, began losing momentum three months ago.
• Strength in the manufacturing sector through the early stages of the recovery was fueled by accelerating exports and business inventory restocking following the severe correction cycle; however, both drivers lost vigor in recent months. During the second quarter, exports advanced just 0.4 percent, a significant slowdown from the first quarter of 2010 and fourth quarter of 2009, when exports grew 4.5 percent and 6.8 percent, respectively. The impact of business inventory growth also declined during the second quarter, accounting for just over 1 percentage point of the overall GDP figure, versus contributions of more than 2.6 percentage points during the previous two periods.
• Recent manufacturing sector indicators reflect weakening but also point to a somewhat orderly slowdown as opposed to a steep drop-off, which should help keep the recovery intact. In July, a leading manufacturing index slipped 70 basis points to 55.5, though the monthly figure indicates continued expansion in the sector. These weaker index results can be largely attributed to reduced orders, a possible sign the post-recessionary boost from business inventory building has run its course. A few bright spots remain, as industrial production rose modestly in July after declining in the previous month. Autos led factory output, a positive shift after the sector’s near collapse last year. Gains were also notable in other segments, including high-tech goods and business equipment, suggesting companies are beginning to satisfy pent-up demand after a prolonged period of conservation.

Impact on Commercial Real Estate

• Industrial property fundamentals weakened considerably in recent years, and the deceleration in export activity may delay the onset of a recovery in investment performance. Fortunately, construction in 2010 will slip to its lowest level in at least 30 years, while absorption turned mildly positive in the second quarter. Combined, this will prevent further significant erosion in occupancy rates and vacancy will increase just 40 basis points in 2010 to 13 percent, following a 200 basis point spike in 2009.
• Healthy manufacturing-sector employment growth has helped stabilize renter demand for apartments in many Midwestern metro areas, including Cleveland, Detroit, Indianapolis and Milwaukee. During the second quarter, all of these markets recorded vacancy declines of 20 basis points or more, along with stable or modest rent growth.