2014 CALIFORNIA COMMERCIAL MARKET OUTLOOK Northern California Commercial Association January 24, 2014 Oscar Wei Senior Research Analyst

2014 CALIFORNIA COMMERCIAL MARKET OUTLOOKNorthern California Commercial AssociationJanuary 24, 2014

Oscar WeiSenior Research Analyst

Overview

• Economic Outlook• California Housing Market Outlook• Commercial Market Outlook• Concluding Remarks

ECONOMIC OUTLOOK

So….what’s happening?

• Economy appears to be gaining strength

• Unemployment rate at 5 year low • “Tapering” has begun : $85B /month bond-buying reduced by $10B/month

• Rates headed higher in 2014• Tax Reform: Mortgage Interest Deduction is on the table

• Future of Fannie and Freddie? Highly profitable today

2005

2006

2007

2008

2009

2010

2011

2012

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-12

Q1-13

Q2-13

Q3-13

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Gross Domestic Product• 2012: 2.2%; 2013 Q3: 4.1%

ANNUAL PERCENT CHANGE, CHAIN-TYPE (2005) $

ANNUALLY QUARTERLY

2009 Largest Annual Drop since 1938 (-3.4%)

SERIES: GDPSOURCE: US Dept. of Commerce, Bureau of Economic Analysis

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13-1,000,000

-800,000

-600,000

-400,000

-200,000

0

200,000

400,000

600,000

800,000

U.S. Non-farm Job Growth• Recession Job Losses: 8.8 million• Since Jan’10: +7.4 million

MONTH TO MONTH CHANGE

SERIES: Employment GrowthSOURCE: US Bureau of Labor Statistics

Employment Growth, California vs. U.S.

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3-8

-6

-4

-2

0

2

4 California US

ANNUAL PERCENT CHANGE

SERIES: Total Nonfarm EmploymentSOURCE: US Bureau of Labor Statistics, CA Employment Development Division

Unemployment Rates Falling (Slowly) • California (8.5%) vs. United States (7.0%)

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

130%

2%

4%

6%

8%

10%

12%

14% CA US

SERIES: Unemployment RateSOURCE: US Bureau of Labor Statistics, CA Employment Development Division

Job Trends by California Metro Area

SERIES: Total Nonfarm Employment SOURCE: CA Employment Development Division


Oakland

Fresno MSA

Inland Empire

Sacramento

Modesto

Los Angeles

Bakersfield

San Diego

Ventura

Orange County

San Francisco

Stockton MSA

San Jose

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

0.3%

0.3%

0.9%

1.5%

1.5%

1.7%

1.7%

1.8%

2.0%

2.1%

2.4%

2.5%

2.9%

• November 2013: CA +1.5%, +226,200

Consumer Confidence Index• December 2013: 78.1

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

30

20

40

60

80

100

120INDEX, 100=1985

SERIES: Consumer ConfidenceSOURCE: The Conference Board

2005

2006

2007

2008

2009

2010

2011

2012

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

2012

Q3

2012

Q4

2013

Q1

2013

Q2

2013

Q3

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Personal Consumption• 2012: 1.9%; 2013 Q3: 2.0%


ANNUALLY QUARTERLY

SERIES: Personal ConsumptionSOURCE: US Dept. of Commerce, Bureau of Economic Analysis

Retail Sales• December 2013: Up 4.0%

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3-15%

-10%

-5%

0%

5%

10%

15% Retail Sales Moving average (Retail Sales)


SERIES: Retail Trade ReportSOURCE: US Census Bureau

U.S. Economic Outlook

Indicator 2008 2009 2010 2011 20122013p2014f

US GDP -0.3% -3.4% 2.4% 1.8% 2.8% 1.8% 2.8%

Nonfarm Job Growth -0.6% -4.4% -0.7% 1.2% 1.7% 1.6% 1.7%

Unemployment 5.8% 9.3% 9.6% 8.9% 8.1% 7.6% 7.0%

CPI 3.8% -0.4% 1.6% 3.1% 2.1% 1.6% 2.1%Real Disposable Income, % Change 0.5% 0.9% 1.8% 1.3% 1.5% 1.5% 4.2%

SERIES: U.S. Economic OutlookSOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

California Economic Outlook

Indicator 2008 2009 2010 2011 20122013p2014f

Nonfarm Job Growth -1.3% -6.0% -1.0% 1.2% 2.1% 2.2% 1.9%

Unemployment Rate 7.2% 11.3% 12.3% 11.8% 10.5% 9.0% 8.4%

Population Growth 0.8% 0.6% 0.7% 0.7% 0.7% 0.9% 0.9%Real Disposable Income, % Change 1.5% -3.9% 1.0% 1.9% 1.1% 1.3% 3.4%

SERIES: CA Economic OutlookSOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

CALIFORNIA HOUSING MARKET OUTLOOK

Sales of Existing Detached Homes• California, Dec. 2013 Sales: 361,890 Units, -5.9% YTD, -18.6% YTY

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3 -

100,000

200,000

300,000

400,000

500,000

600,000

700,000

*Sales are seasonally adjusted and annualized SERIES: Sales of Existing Single Family HomesSOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Median Price of Existing Detached Homes• California, December 2013: $438,040, Up 19.7% YTY

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3 $-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000 P: May-07$594,530

T: Feb-09$245,230-59% frompeak

SERIES: Median Price of Existing Single Family HomesSOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Unsold Inventory Index• California, December 2013: 3.0 Months

Note: “Unsold Inventory Index” represents the number of months it would take to sell the remaining inventory for the month in question. The remaining inventory for the month is defined as the number of properties that were “Active”, “Pending”, and “Contingent” (when available) and divide the sum by the number of “Sold” properties for the month in question.

0

2

4

6

8

10

12

14

16

18

SERIES: Unsold Inventory Index of Existing Single Family HomesSOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

California Housing Market Outlook

Indicator 2008 2009 2010 2011 20122013p2014f

SFH Resales (000s) 381.4 474.9 416.5 422.6 439.4 413.6 426.8

% Change 30.4% 24.5% -12.3% 1.4% 4.0% -5.9% 3.2%

Median Price ($000s) $348.5 $275.0 $305.0 $286.0 $319.3 $407.1 $431.5

% Change -37.8% -21.1% 10.9% -6.2% 11.6% 27.5% 6.0%

30-Yr FRM 6.0% 5.0% 4.7% 4.5% 3.7% 4.1% 5.3%

1-Yr ARM 5.2% 4.7% 3.8% 3.0% 2.7% 2.7% 3.1%

SERIES: CA Housing Market OutlookSOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

COMMERCIAL MARKETS OUTLOOK

Commercial Segments

Office Industrial

Retail

Multi-Family

CRE Transactions volume up slightly

SOURCE: Wells Fargo, Real Capital Analytics

Billions of Dollars

Prices up sharply over the past year

SOURCE: Wells Fargo, NCRIEF

CRE Cap Rate vs. 10-Year Treasury Yields

SOURCE: Wells Fargo, Real Capital Analytics

Percent Yield

Nonresidential construction spending bounced back in November…

SOURCE: U.S. Dept. of Commerce

… but will it continue to rise in 2014?

SOURCE: American Institute of Architects

OFFICE SPACE

Office Segment Drivers

Financial Services Business Services

Government

Other Services

U.S. Outlook - Office

OFFICE 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4

Vacancy Rate 16.0% 15.7% 15.7% 15.6% 15.6% 15.5% 15.5% 15.4%

Rent Growth 0.6% 0.6% 0.7% 0.6% 0.6% 0.6% 0.6% 0.7%

Net Absorption ('000 sq. ft) 10,268 9,844 9,209 13,423 13,449 10,561 12,069 10,066

Completions ('000 sq. ft) 7,220 6,635 5,500 11,745 9,882 9,957 8,254 7,520

Inventory ('000,000 sq. ft) 4,096 4,095 4,100 4,111 4,120 4,131 4,139 4,147

SOURCE: National Association of REALTORS®, REIS

Increasing Workplace Density

SOURCE: Cushman & Wakefield, Corenet Global 2013 Survey

Los

AngelesSacrament

oSan Diego

San Francisco

San Jose

2011-Q1 14.9 20.2 18.6 14.7 22.8

2011-Q2 14.9 19.8 18.3 14.8 23.0

2011-Q3 15.0 19.8 18.1 14.7 22.3

2011-Q4 15.2 20.6 18.0 14.8 21.9

2012-Q1 15.6 20.6 17.5 14.2 20.8

2012-Q2 15.5 20.9 17.3 13.9 19.9

2012-Q3 15.7 20.9 16.8 13.4 19.6

2012-Q4 15.7 21.0 16.4 13.8 19.0

2013-Q1 15.7 21.4 16.4 13.5 19.1

2013-Q2 16.0 21.4 16.3 13.6 18.8

2013-Q3 15.8 21.3 16.3 13.3 18.6

Vacancy Rates for the Office Segment


Los

AngelesSacrament

oSan Diego

San Francisco

San Jose

2011 15.2 20.6 18.0 14.8 21.9

2012 15.7 21.0 16.4 13.8 19.0

2013 P 16.0 21.3 16.2 13.0 17.8

2014 F 15.3 20.4 15.7 12.8 18.3

Vacancy Rates for the Office Segment


Average Asking Rents for the Office Segment

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Los Angeles Sacramento San DiegoSan Francisco San Jose

Percent Change


Average Asking Rents for the Office Segment

2011 2012 2013P 2014 F0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

0.4

1.41

2.2

0.2 0.2 0.2

1.3

0.40.9

1.7

2.5

7.3

6.66

5.6

3.2 3.1

4.8 4.9

Los Angeles Sacramento San Diego San Francisco San JosePercent Change


INDUSTRIAL SPACE

Industrial Segment Drivers

Manufacturing

Transportation & Logistics

Wholesale/Retail Trade

U.S. Outlook - Industrial

INDUSTRIAL 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4

Vacancy Rate 9.6% 9.4% 9.4% 9.2% 9.0% 8.9% 8.7% 8.6%

Rent Growth 0.5% 0.6% 0.6% 0.7% 0.6% 0.6% 0.6% 0.7%



Inventory ('000,000 sq. ft) 8,421 8,441 8,450 8,433 8,453 8,474 8,488 8,501


Los

AngelesSacrament

oSan Diego

San Francisco

San Jose

2011 5.1 14.2 9.0 13.1 17.9

2012 4.4 13.6 8.0 12.0 17.1

2013P 4.0 12.6 7.1 11.1 16.8

2014F 3.7 11.9 6.6 10.7 16.3

Vacancy Rates for the Industrial Segment


Average Asking Rents for the Industrial Segment

2011 2012 2013P 2014F-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-1.5

1.5

2.5 2.5

-1.2

1.2

2.62.8

-1.6

1.2 1.2

2.4

-1.2

0.5

1.5

2.7

1.51.2

0.7

2

Los Angeles Sacramento San Diego San Francisco San JosePercent Change


RETAIL SPACE

Retail Segment Drivers

Retail sales Growth in economy & jobs

Consumer expenditures

Consumer credit

U.S. Outlook - Retail

RETAIL 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4

Vacancy Rate 10.7% 10.5% 10.5% 10.4% 10.3% 10.2% 10.0% 9.9%

Rent Growth 0.2% 0.4% 0.4% 0.4% 0.5% 0.5% 0.6% 0.6%



Inventory ('000,000 sq. ft) 2,034 2,036 2,037 2,035 2,036 2,039 2,042 2,046


Los

AngelesSacrament

oSan Diego San Francisco San Jose

2011-Q1 6.2 13.0 7.4 3.6 6.0

2011-Q2 6.2 12.7 7.3 3.8 6.1

2011-Q3 6.5 12.7 7.1 3.7 6.0

2011-Q4 6.5 12.4 6.7 3.7 6.0

2012-Q1 6.6 12.0 6.5 3.8 5.8

2012-Q2 6.3 11.9 6.4 3.9 5.9

2012-Q3 6.1 12.4 6.4 3.9 5.9

2012-Q4 6.2 12.7 6.3 3.7 6.0

2013 –Q1 6.1 12.9 6.4 3.6 5.9

2013-Q2 6.1 12.7 6.2 3.9 6.0

2013-Q3 6.0 12.5 6.2 3.9 5.8

Vacancy Rates for the Retail Segment


Los

AngelesSacrament

oSan Diego

San Francisco

San Jose

2011 6.5 12.4 6.7 3.7 6.0

2012 6.2 12.7 6.3 3.7 6.0

2013 P 6.0 12.5 6.2 4.0 5.8

2014 F 5.6 12.1 6.1 3.7 6.0

Vacancy Rates for the Retail Segment


Average Asking Rents for the Retail Segment

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Los Angeles Sacramento San DiegoSan Francisco San JosePercent

Change


Average Asking Rents for the Retail Segment

2011 2012 2013P 2014 F-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.60.9

1.5

2.2

-0.5 -0.6

1.31.6

0

0.9

1.7

2.1

-0.6

0.4

1.4

1.9

0.2

0.8

2.11.9

Los Angeles Sacramento San Diego San Francisco San Jose

Percent Change


MULTI-FAMILY

Pent-up demand continues to drive multifamily sector, while new supply still falls short

• Market conditions in multifamily rental housing have tightened since the housing crisis began; Renter share in California larger than US

• Sustained low household formation has caused unprecedented pent-up demand;

• New supply falls far short of potential demand;

• Key factor limiting rent growth: wages.

• Credit dings keep many households in the rental market and out of the housing market

0

1

2

3

1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Household formation plunged during the Great Recession, well below its trend pace

Percent change over year ago

Fitted Trend

Source: U.S. Census Bureau, Haver Analytics.

Pent-Up Demand for Housing is RealHousehold Formation will Rebound with Jobs

30,000

31,000

32,000

33,000

34,000

35,000

36,000

37,000

38,000

11,400,000

11,600,000

11,800,000

12,000,000

12,200,000

12,400,000

12,600,000

12,800,000

13,000,000

13,200,000

13,400,000

Total Population, CaliforniaNumber of Households, California (right axis)Projected linear estimate

In t

hou

san

ds

377K

575K

U.S. Outlook – Multi-Family

MULTI-FAMILY 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4

Vacancy Rate 4.0% 3.9% 3.9% 3.9% 4.0% 4.0% 4.0% 4.0%

Rent Growth 1.0% 1.1% 1.2% 1.4% 1.2% 1.1% 1.0% 1.0%

Net Absorption (units) 64,954 63,554 74,606 79,787 47,091 49,005 56,658 58,571

Completions (units) 31,851 37,155 33,929 43,284 35,170 44,672 40,793 43,289

Inventory (units in imillions) 9.9 9.9 10.0 10.1 10.1 10.1 10.2 10.2


Los

AngelesSacrament

oSan Diego

San Francisco

San Jose

2011-Q1 4.6 5.7 4.0 4.0 3.4

2011-Q2 4.4 5.4 3.7 3.8 3.2

2011-Q3 4.2 5.4 3.4 3.6 3.1

2011-Q4 3.9 4.8 3.1 3.4 2.9

2012-Q1 3.7 4.4 3.0 3.2 2.7

2012-Q2 3.6 4.3 3.0 3.1 2.5

2012-Q3 3.5 4.2 3.0 3.2 2.7

2012-Q4 3.3 3.8 2.7 3.3 2.8

2013-Q1 3.2 3.7 2.4 3.2 2.5

2013-Q2 3.2 3.6 2.5 3.1 3.0

2013-Q3 3.2 3.4 2.3 3.1 2.9

Vacancy Rates for the Multi-Family Segment


Los

AngelesSacrament

oSan Diego

San Francisco

San Jose

2011 3.9 4.8 3.1 3.4 2.9

2012 3.3 3.8 2.7 3.3 2.8

2013 P 3.1 3.2 2.1 3.1 2.8

2014 F 3.2 3.0 2.3 3.1 3.1

Vacancy Rates for the Multi-Family Segment


Average Asking Rents for the Multi-Family Segment

0

0.5

1

1.5

2

2.5

Los Angeles Sacramento San DiegoSan Francisco San Jose

Percent Change


Average Asking Rents for the Multi-Family Segment

2011 2012 2013 P 2014 F0

1

2

3

4

5

6

1.1

3.33.6 3.5

1.4

2.3

1.7

2.7

2 2.1

3

4

4.65

4.7 4.74.6 4.6

5.4

4.5

Los Angeles Sacramento San Diego San Francisco San Jose

Percent Change


SERIES: New Housing PermitsSOURCE: Construction Industry Research Board

New Housing Permits• California, Nov. 2013: 6,673 Units, Up 40.6% YTD

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

30

5,000

10,000

15,000

20,000

25,000 Single Family Multi-Family

New Housing Permits• Los Angeles County, November 2013: 1,683 Units, Up 37.9% YTD

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

30

500

1,000

1,500

2,000

2,500

3,000



New Housing Permits• Sacramento County, Nov. 2013: 113 Units, +53.5% YTD

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

30

200

400

600

800

1,000

1,200



New Housing Permits• San Diego County, Nov. 2013: 1,256 Units, +37.2% YTD

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

30

500

1,000

1,500

2,000

2,500



New Housing Permits• San Francisco County, Nov. 2013: 466 Units, +103.4% YTD

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

30

200

400

600

800

1,000



New Housing Permits• Santa Clara County, Nov. 2013: 365 Units, +4.7% YTD

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

30

200

400

600

800

1,000

1,200

1,400

1,600

1,800



CONCLUDING REMARKS

Commercial RE OutlookOfficeDemand for office space increases, as employment rises, but is

affected by firms’ decision to increase workplace density Markets with high concentrations of energy or tech companies

see stronger growthDecline in vacancy rate accompanied with moderate growth in

rents

Industrial Demand for industrial spaces remains strong as online shopping

continues to growVacancy rates low in LA and OCRents rising modestly in 2013 and 2014Construction activity remains strong

SOURCE: National Association of REALTORS®

Commercial RE OutlookRetailThe market remains in slow motion as retailers continue to be cautious

Growth has been uneven due to the increasing divide of the consumer base

Rent will inch up slightly

Multi-FamilyPent-Up demand continues to fuel the apartment rental market

Vacancy rate dropped to 4.0% in 2014(from 5.2% in 2011)Rent growth subdued in near term as wage and salary growth remain sluggish

SOURCE: National Association of REALTORS®

http://www.car.org/marketdata/map

For more information:http://www.facebook.com/CARResearchgroup

http://www.facebook.com/CARResearchgroup

http://www.facebook.com/CARResearchgroup

C.A.R. Finance Helpline

Finance.car.org(213) 739-8383

Get one-on-one assistance with short sales, funding, REOs, Deeds in

Lieu, and closing transactions.

NEW

C.A.R.

Member

Benefit for

2013!

THANK YOU!WWW.CAR.ORG/MARKETDA

[email protected]

Documents

2014 CALIFORNIA COMMERCIAL MARKET OUTLOOK Northern California Commercial Association January 24, 2014 Oscar Wei Senior Research Analyst