Rise in Durable Goods Orders a Positive Sign for Economy

• Further signs of a pending economic stabilization emerged with this week’s announcement of durable goods orders spiking 4.9 percent in July, the largest monthly increase in nearly two years. The improvement was driven by a near doubling of civilian aircraft orders; however, non-transportation orders also rose 0.8 percent, the third consecutive monthly gain.

  
  
  
  
  

• The “Cash for Clunkers” program helped boost orders for motor vehicles by 0.9 percent in July, marking just the second monthly increase in auto orders this year. The government incentive program was in place for nearly all of August, which should fuel an additional uptick in this month’s measurement. A similar government program for energy-efficient appliances could offer a much-needed boost to retailers.

• The increases in new orders and shipments are positive news for the economy, particularly in parts of the country that have been battered by employment losses in the manufacturing sector. In the past year, more than 1.6 million manufacturing jobs have been shed nationwide, a 12.2 percent decline. Losses in July slowed considerably, however, and the uptick in orders will likely provide some support to the industry as manufacturers slowly increase production to meet rising demand.

• Tenant demand for industrial properties could increase in the months ahead if the production of durable goods continues to gain momentum. In the first half of this year, negative net absorption of industrial space exceeded 63 million square feet, and effective rents declined by more than 4 percent. Any rise in demand would be welcome news to owners of industrial properties, and, with the construction of new space slowing, rents and vacancies could begin to stabilize in the coming quarters. Property fundamentals in the industrial sector will likely be among the first to recover when the recession comes to an end.

• Retailers also should benefit from increased orders. Durable goods orders are a predictor of future consumer demand, and if this demand materializes, it should result in greater foot traffic and sales for merchants. Operators of retail properties have cut effective rents by more than 3 percent in the past year, often by raising concessions to beleaguered tenants. Improving sales ultimately should allow operators to bring concessions closer to historical averages, which would boost NOIs and investor demand for assets.

Auto Sales Spike in July; Economic Data Remains Mixed

• The “Cash for Clunkers” program is proving popular with consumers, as new car production is ramping up, and auto sales have gained momentum. While weakness persists, some recent data signal that the economy is beginning to pull out of the recession. Specifically, second quarter gross domestic product and July employment contractions were much less severe than in preceding periods; both measurements beat market expectations.



• Following eight consecutive months of contraction, industrial production surged 1 percent in July, the largest monthly increase in nearly three years. Additional output gains are expected in the coming months, as inventories have been retreating for nearly a year, and businesses will have to order new stock to meet demand. Improvement in the battered manufacturing sector could boost employment and incomes and should ultimately stimulate demand for industrial properties.



• While the base of a recovery is forming, the economy remains soft. Retail sales dipped 0.1 percent in July, despite a 2.4 percent increase in auto sales and parts. Core retail sales, which exclude auto and gas, fell 0.4 percent in July, marking the fifth consecutive monthly decline, and are down a record 4.6 percent year over year. Retail vacancy has surged 230 basis points to 9.5 percent since the onset of the recession.



• Falling consumer sentiment will likely continue to weigh on retail property performance in the coming months. Preliminary data for August show consumer sentiment is at its lowest point since March due to ongoing weakness in the job market.



• With the economy expected to pull out of the recession by the end of this year, commercial real estate investors are beginning to more closely evaluate opportunities in the marketplace. Tenant quality has emerged as a primary consideration in the current climate, as business bankruptcies are at their highest level since 1993. Investors targeting office and retail properties will want to thoroughly examine the solvency of existing tenants when considering acquisitions.