Rising Interest Rates And Commercial Real Estate

Commercial Real Estate

While rising rates do translate into higher borrowing costs and often higher capitalization rates, which can lead to lower asset values, the notion that rising rates are categorically bad for real estate equities is somewhat overstated, and often incorrect. Rising rates tied to an improving economy, which is what we are seeing today in the U.S., can actually provide a constructive backdrop for the asset class. An improving economy typically means landlords benefit from better operating fundamentals – lower vacancy rates, higher lease rates and better acquisition/development yields.

There are numerous past periods when rates rose on the back of an improving economy and real estate performed well. In fact, during the five periods of rate increases since 2000, the MSCI U.S. REIT Index averaged a 1.2% return over the three months following the initial rate increase and a 14.7% return over the ensuing 12 months (outpacing the S&P 500 Index by more than 200 basis points).

Global Evolution a Game Changer for Real Estate
Patrick Brophy, Janus Capital Group

Industrial Production Grows In September

U.S. industrial production increased 1.0% in September after having decreased 0.2% in August. At 105.1% of its 2007 average, total industrial production in September was 4.3% above its level of a year earlier.

IP Change

Industrial Production

The output of manufacturing increased 0.5% in September, production at mines increased 1.8%, and output of utilities rose 3.9%.

Capacity utilization for total industry decreased in September to 79.3%. That is 0.8% below its long-run (1972–2013) average.

Capacity Utilization

Weekly Initial Jobless Claims Drop To 264k

Initial jobless claims for the week ending October 11 were a seasonally adjusted 264k, down from the prior week’s revised reading of 287k. Not seasonally adjusted, jobless claims for the week were 272k.

Jobless Claims

Individual states that had changes in claims of more than 1k (not seasonally adjusted):

States

The 4-week moving average of initial jobless claims was 284k.

Jobless Claims 4W

The number of unemployment insurance recipients, or continuing claims, for regular state programs was 2.389 million, up from the previous week’s revised reading of 2.382 million.

Unemployment Insurance Recipients

The insured unemployment rate, which is the number of unemployment insurance recipients as a share of covered employment, was 1.80%, unchanged from the week prior.

Insured Unemployment Rate

90.54% of all U.S. jobs are covered by state unemployment insurance programs.

Covered Employment

Of the 9.262 million Americans currently unemployed, 25.79% receive unemployment insurance.

UI Recipients Share

Jobless claims and the unemployment rate:

Labor Market

Treasury Runs Budget Surplus Of $105.8 Billion In September

The federal government ran a budget surplus of $105.8 billion during the month of September. This compares with a $75.1 billion surplus in September of 2013.

Treasury Monthly

Receipts for the month totaled $351.7 billion, up from $301.4 billion a year earlier. Total outlays were $245.9 billion from $226.43 billion a year earlier.

The rolling 12-month U.S. government budget deficit through September was $484.4 billion, an improvement from $515.1 billion in August. The rolling 12-month budget balance as a percentage of gross domestic product is -2.80%.

Budget Balance

Manufacturing And Trade Sales Slip In August

The combined value of distributive trade sales and manufacturers’ shipments for August, adjusted for seasonal and trading-day differences but not for price changes, was estimated at $1.353 trillion. That is down 0.4% from July and up 4.4% from a year ago.

Manufacturers’ and trade inventories were estimated at an end-of-month level of $1.752 trillion. That is up 0.2% from July and up 5.6% from a year ago.

Both Monthly Change

Annual Change

Trade Monthly

Monthly Trade

The total business inventories-to-sales ratio at the end of August was 1.295, up from 1.287 in July. The August 2013 ratio was 1.280.

Ratios

Retail Sales Decline In September

Retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $442.7 billion.

Retail Sales Monthly

This is down 0.3% from August’s sales, and follows seven consecutive months of increases. Retail sales are up 4.3% from September 2013.

Retail Sales Change

Sales increased the most in September for electronics & appliances, rising 3.4%. All categories except for gas stations have seen retail sales increase year over year.

Retail Sales