Why a service sector rebound in March affects key office REITs

Market Realist

Key takeaways for March's Institute for Supply Management release (Part 3 of 4)

(Continued from Part 2)

The Institute of Supply Management non-manufacturing index assesses the state of non-manufacturing business in the United States

The Institute of Supply Management (ISM) Purchasing Manager’s Index (PMI) is similar to the other regional PMI indices, but it covers the entire country. It’s the sister index to the ISM Manufacturing Purchasing Managers Index. The non-manufacturing ISM looks at various business indices, like new orders, production, employment, supplier deliveries, inventory, customer inventories, prices, backlog, exports and imports, and capital expenditures. A reading over 50 means the sector in question is generally expanding. Office REITs like Boston Properties (BXP), Kilroy (KRC), Vornado (VNO), S.L. Green (SLG), and Highwoods (HIW) are particularly affected by the services sector.

Services activity rebounded in March in tandem with the ISM manufacturing index

The index showed that overall activity in the non-manufacturing sector increased for the 50th consecutive month and the pace of growth is accelerating. The manufacturing sector is outperforming the services sector. The overall index rose from 51.6 in February to 53.1 in March. The business activity index hit 53.4% and the employment index jumped from 47.5 to 53.6. The jump in employment was encouraging. Thirteen of the industries reported expansion. The best-performing sectors were agriculture, transportation, and construction. Mining, arts, entertainment and recreation, and education performed the worst. The elephant in the room of course will remain Obamacare and how it impacts corporate cost structures going forward.

Some key quotes from the survey:

  • “Cold weather played more havoc on revenue, causing steep declines for nearly a week, and then picked up well beyond expectations. Overall, per capita spending increases, but frequency of visits are down; net neutral to slightly positive.” (Arts, Entertainment & Recreation)
  • “Demand is rising; while at the same time there is pressure to reduce staffing expenses.” (Finance & Insurance)
  • “Healthcare reform continues to adversely impact hospital projected/actual revenue.” (Health Care & Social Assistance)
  • “Weather in Northeast — lost business days/business travel and site visits impacted. Energy costs rapidly increasing.” (Professional, Scientific & Technical Services)

Continue to Part 4

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