Economic Recovery Hinges on Commercial Real Estate and Housing Sectors

Strategic Insights -

The recent GDP numbers indicate that the commercial real estate sector is expected to continue declining in the coming quarters due to massive amounts of idle space and empty strip malls. However, the residential side of the economy showed a surprising increase, rising 23.4% and marking the first increase in almost four years. This turnaround is largely attributed to government support, including the first-time buyer tax credit and the Federal Reserve's purchase of Fannie Mae and Freddie Mac-backed paper to artificially suppress mortgage rates.

Key Takeaways:

  • Moody's estimates that the value of commercial real estate has plunged by 41% since the peak a little over a year ago.
  • Commercial real estate investment is expected to continue declining in the coming quarters due to a lack of incentive to build new space.
  • Spending on equipment and software (E&S) is starting to come back, rising 1.1% after a 4.9% decline in the 2Q and a 36.4% plunge in the 1Q.
  • The Microsoft operating system will likely generate a new PC cycle, but capacity utilization is still around 70%, indicating a cautious approach to new factory equipment orders.
  • Residential investment rose 23.4% after declines of 23.3% in the 2Q and 38.2% in the 1Q, marking the first increase in almost four years.
  • The government support, including tax credits and Fed purchases, has played a significant role in the turnaround of the housing sector.
  • ExxonMobil Corporation reported third-quarter 2009 earnings of 98 cents per share, below the Zacks Consensus Estimate of $1.04 and year-earlier earnings of $2.58.
  • ExxonMobil maintained its quarterly dividend of 42 cents per share and repurchased $4 billion worth of common stock.
  • ExxonMobil's production of oil and natural gas averaged 3.69 million oil-equivalent barrels per day, up approximately 3% year over year, and 5% when adjusted for entitlement volumes and OPEC quota restrictions.

Statistics:

  • The value of commercial real estate has plunged by 41% since the peak a little over a year ago (Moody's estimate).
  • Commercial real estate investment is expected to continue declining in the coming quarters.
  • Spending on equipment and software (E&S) rose 1.1% after a 4.9% decline in the 2Q and a 36.4% plunge in the 1Q.
  • Residential investment rose 23.4% after declines of 23.3% in the 2Q and 38.2% in the 1Q.
  • ExxonMobil's production of oil and natural gas averaged 3.69 million oil-equivalent barrels per day, up approximately 3% year over year.
  • ExxonMobil's refinery throughput averaged 5.35 million barrels per day, flat from the year-earlier level.

Sources:

  • Zacks Equity Research
  • Moody's (NYSE: MCO)
  • Microsoft (Nasdaq: MSFT)
  • Fannie Mae (NYSE: FNM)
  • Freddie Mac (NYSE: FRE)
  • ExxonMobil Corporation (NYSE: XOM)