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2/16/2017
1
SPONSORED BY:FEBRUARY BREAKFAST PROGRAM
CAPITAL MARKETS FORECAST 2017
Commercial Real EstateBanking
James Payne
Senior Vice President, Seattle Market Manager
2/16/2017
2
3U.S. BANK |
Agenda
1. Banking Industry Overall
2. Current Topics in CRE Banking
3. U.S. Bank Commercial Real Estate
4U.S. BANK |
Been a good last 7 months
• KBW Bank Index (BKX) – consists of 24 banking stocks and is widely served as the benchmark for the banking sector. • Up 52% since end of June 2016
Source: Bloomberg.com on 2/8/17
2/16/2017
3
5U.S. BANK |
More Good Times For Banking
• Strong Q4 Earnings
• Record Stock Prices
• Expect Rising Interest Rates
• Possible Banking Regulation (Dodd-Frank) Reform
“…Well positioned to grow and deliver to our shareholders in 2017”
“Outstanding performance in 2016 with record net income,
EPS, and Revenue…”
“Q4 Earnings were a strong end to another
record year…”
6U.S. BANK |
Hot Topic within CRE banking
• High Volatility Commercial Real Estate (HVCRE) – is your construction loan classified as HVCRE or Not?
Generally two primary items for consideration:
1) Minimum Cash Equity contributed by Borrower > 15% of “As - Completed” Appraised Value.
- Does not include appreciated land value
2) Borrower internally generated capital must stay within the Project/Borrower.
Item #2 is generally the grey area with little guidance from the regulators.When is the loan considered “permanent” ? When are Borrower Distributions allowed, if any ?
If HVCRE loan = costs for both the Bank and Borrower
2/16/2017
4
7U.S. BANK |
CRE Industry: Do we need to worry?
• Are we in the later stage of the current real estate cycle?
• Construction delays coupled with rising costs and labor shortage
• Multi-Family • Supply concerns• Most projects are luxury with a high-price point• Still have rent growth but it is slowing• Concessions starting
• Where is the retail market going? The “Haves” vs. The “Have-Not's”
• Will some of the concerning national trends show up here in Seattle?
8U.S. BANK |
U.S. Bank – Commercial Real Estate
• Approx. 400 CRE professionals in 29 CRE offices• 31% Multi-Family, 21% Office, 16% Lodging, 13% Retail, 5% Industrial, 14% Other• Areas of Focus: Lending, Capital Markets, Deposit & Treasury Management
2/16/2017
5
9U.S. BANK |
U.S. Bank – Commercial Real Estate
CRE Loan Growth CRE Deposit Growth
In Millions In Millions
$11,000
$12,000
$13,000
$14,000
$15,000
$16,000
$17,000
$18,000
$19,000
$20,000
$21,000
$22,000
$23,000
$24,000
$25,000
$26,000
$27,000
2012 2013 2014 2015 2016$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
2012 2013 2014 2015 2016
10U.S. BANK |
U.S. Bank – Commercial Real Estate
Vive Apartments (Ballard)
929 Office Tower (Bellevue)
Lincoln Square Expansion (Bellevue)
Residence Inn (Downtown Seattle)
2/16/2017
6
CLARION PARTNERS
REAL ESTATE INVESTMENT MANAGEMENTWWW.CLARIONPARTNERS.COM
200 NEWPORT AVENUE: QUINCY, MASSACHUSETTS
OFFICE & INDUSTRIAL CAPITAL MARKETS
WWW.CLARIONPARTNERS.COM FOR USE WITH INSTITUTIONS ONLY. NOT FOR USE WITH THE INVESTING PUBLIC.
REAL ESTATE INVESTMEN T MANAG EMEN T
Dean Rostovsky, Director │ March 2017
REAL ESTATE INVESTMENT MANAGEMENTWWW.CLARIONPARTNERS.COM
2016 Themes – Office
– Continuation of yield starvation
– Lack of core fund/ODCE buyers for office
– Greater participation by other types of buyers
• Private
• Foreign
• REITs
– Pricing of high quality…strong!
12
2/16/2017
7
REAL ESTATE INVESTMENT MANAGEMENTWWW.CLARIONPARTNERS.COM
2017 Themes
– Rate rise…continuation?... impacts?
– Presumed extension of economic/real estate cycle
– Election (presumed) economic positives
• Tax policy, infrastructure spending, deregulation
– Election (presumed) negatives
• Trade and labor
– Real estate fundamentals strong
13
REAL ESTATE INVESTMENT MANAGEMENTWWW.CLARIONPARTNERS.COM
Los Angeles Office – Investment Sales
Colorado Center
The Bluffs at Playa Vista
233 Wilshire Blvd.
The Spruce Goose Hangar
1299 Ocean Ave.
14
2/16/2017
8
REAL ESTATE INVESTMENT MANAGEMENTWWW.CLARIONPARTNERS.COM
Seattle Office – Investment Sales
West 8th
Urban Union
Amazon Phase VII
Amazon Phase VIII
Hill 7
15
REAL ESTATE INVESTMENT MANAGEMENTWWW.CLARIONPARTNERS.COM
– Key drivers: e-commerce, consumer spending, international trade, improving home construction and sales
– A logistics chain overhaul in progress: urbanization and growing consumer desire for faster home delivery
– 2016 net absorption: new supply = 1.4 : 1
– Supply pipeline growing, new construction concentrated in top-performing markets
– Functional/locational obsolescence ! a significant driver for new development
Source: CBRE-EA, NCREIF, Clarion Partners Investment Research, Q4 2016 (rent data estimated as of Q3) Note: Past performance is not indicative of future performance. LTA = long-term average.
16
U.S. INDUSTRIAL FUNDAMENTALS
US: Strongest Industrial Recovery in History
2013 2014 2015 2016
Availability Rate (LTA=10.3%) 10.8% 9.8% 8.9% 8.2%
Absorption % of Stock 2.0% 1.9% 1.9% 1.9%
Supply % of Stock 0.6% 1.0% 1.2% 1.3%
Rent Growth 3.6% 4.8% 5.3% 6.6%
2/16/2017
9
REAL ESTATE INVESTMENT MANAGEMENTWWW.CLARIONPARTNERS.COM
Los Angeles County Industrial Fundamentals
As of Q4 2016
– 939 million sf
– 3.9 million sf absorption
– 1.1% vacant
– 4.7 million under construction
– Strong rent trend
17
The Brickyard
Source: CBRE Research
REAL ESTATE INVESTMENT MANAGEMENTWWW.CLARIONPARTNERS.COM
Greater Seattle Industrial Fundamentals
As of Q4 2016
– 267 million sf
– 4 million sf absorption
– 2.6% vacant
– 4.7 million under construction
– Strong rent trend
18
Kent Valley Industrial Portfolio
Source: Colliers
2/16/2017
10
SEATTLE INVESTMENT MARKET OFFICE & INDUSTRIAL
FEBRUARY 15, 2017
20
KEY INVESTMENT THEMES: SEATTLE INDUSTRIAL & OFFICE
OFFICE
• NEAR RECORD SALE VOLUMES
• STRONG FUNDAMENTALS
• CHANGE IN BUYER PROFILE
• DISPARITY IN CBD VS SUBURBAN
• STRANDED TRANSACTIONS
INDUSTRIAL
• RECORD SALE VOLUMES
• RECORD LOW VACANCY RATES
• DEMAND > SUPPLY
• INVESTORS STRETCHING TO SMALLER TRANSATIONS
2/16/2017
11
21
PUGET SOUND INDUSTRIAL RENT & VACANCY
Source: CBRE Research
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
$0.30
$0.35
$0.40
$0.45
$0.50
$0.55
$0.60
$0.65
2009 2010 2011 2012 2013 2014 2015 2016
Blended Rent, NNN (left axis)Vacancy (right axis)
22
PUGET SOUND INDUSTRIAL INVESTMENT VELOCITY
$1.7
$2.5
$2.3
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Tota
l Sale
Pri
ce in
Bill
ions
Source: Real Capital Analytics
2/16/2017
12
23
PUGET SOUND OFFICE RENT & VACANCY
Source: CBRE Research
0%
5%
10%
15%
20%
25%
$25.00
$27.00
$29.00
$31.00
$33.00
$35.00
$37.00
2009 2010 2011 2012 2013 2014 2015 2016
Class A Asking Rent, FS (left axis) Vacancy (right axis)
24
TRANSACTION VOLUME COMPARISONOFFICE PRODUCT
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
Billio
ns
2015 Sales Volume 2016 Sales Volume
Western U.S.2015: $47B2016: $48B
Western U.S.2015: $47B2016: $48B
2/16/2017
13
25
TRANSACTION VELOCITY COMPARISONOFFICE PRODUCT
0
50
100
150
200
250
300
350
400
450
Western U.S. Deal Count
2015 # of Sales 2016 # of Sales
Western U.S.19% DecreaseWestern U.S.19% Decrease
26
$1.5 $1.8
$2.9
$6.1
$0.5 $0.3
$1.2
$1.7
$4.5
$3.3
$1.9
$4.4 $4.7
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
$ Billions
Annual $ Volume
PUGET SOUND OFFICE SALES VOLUMEConsideration greater than $10 million
Source: 9pt, Dark Grey.
2/16/2017
14
27
INVESTMENT RETURNS – A TALE OF TWO PROFILESS
UB
UR
BA
NN
• ~ 7.0% Stabilized CAP Rates• Multi-tenant, shorter lease
terms• Price PSF < Replacement Cost• Limited Institutional/Foreign
Demand• Debt Financing comparable to
CBD
• Sub 5.0% Stabilized CAP Rates• Single-tenant, long term leases
28
2016 HANGOVER EFFECT – TOTAL CONSIDERATION & NUMBER OF DEALS103 TRANSACTIONS !!!! $11.05 BILLION
20
11
14
24
2
10
15
7
0
5
10
15
20
25
30
$0
$500,000,000
$1,000,000,000
$1,500,000,000
$2,000,000,000
$2,500,000,000
$3,000,000,000
$3,500,000,000
$4,000,000,000
LosAngeles
OrangeCounty
San Diego Bay Area Portland Seattle Phoenix Denver
Nu
mb
er
of D
ea
ls
Tota
l Co
nsi
de
ratio
n
Total Consideration # of Deals
2/16/2017
15
29
CAPITAL MARKETS OUTLOOKINSTITUTIONAL INVESTORS ARE INCREASING ALLOCATIONS
• INSTITUTIONAL INVESTORS REMAIN UNDERWEIGHT REAL ESTATE
"
"
FOREIGN INVESTOR RATIONALE FOR U.S. REAL ESTATE
• U.S. REMAINS THE MOST FAVORED DESTINATION FOR REAL ESTATE INVESTMENT
• FOREIGN INVESTORS CONTINUE TO FAVOR LARGE GATEWAY U.S. CITIES
8.9%
9.9%
10.3%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
2016 Actual 2016 Target 2017 Expected
2016 Actual % Invested vs. 2016 & 2017 Target Allocations (1)
100 bps
40 bps
140 bps
Percent of Acquisitions Made by Cross-Border Buyers (2)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
Fo
reig
n C
ap
ital P
erc
en
tag
e o
f To
tal
Tra
ns
ac
tio
n V
olu
me (
$M
)
Foreign Investment in U.S. CRE Percent of Total
Seattle-Bellevue-Everett
Multifamily Overview
2/16/2017
16
State of the Market
31
Source: ESRI Business Analytics, Dupre and Scott
Source: JLL Research, Dupre + Scott, CoStar PPR
5New jobs added per unit built
9,367Units delivered in 2016
9,298Units absorbed in 2016
49,600Jobs added in 2016
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
0
10,000
20,000
30,000
40,000
50,000
60,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Units Delivered Net Absorption Jobs Rent Growth Vacancy Rate
Multifamily market dynamics supply and demand Seattle-Bellevue-Everett Largest supply in history and vacancy remains low because of the equally high absorption and job growth
Units forecasted:under construction, planned or proposed
32
Source: Yardi Matrix, Dupre and Scott
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
2013
2014
2015
2016
Number of Units
Buyer profile
REIT Large Operator High Net Worth Government Advisor/Investment Manager/Fund
Historic tri-county sales volumeJLL Sales
$.0bn
$1.0bn
$2.0bn
$3.0bn
$4.0bn
$5.0bn
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Sales Volume 100 units plus
King County Pierce County Snohomish County
RadiusSold February 2017
$141,000,000$500,000 / Unit
LIV Bel-RedSold September 2016
$172,000,000$381,375 / Unit
SorenSold August 2016
$45,553,000$410,387 / Unit
TivalliSold March 2016
$94,250,000$246,084 / Unit
2/16/2017
17
33Source: Dupre and Scott
Estimated Employees: 40,000 (30,000 in Seattle)Projection: 80,500 by 2022Location: South Lake Union- Will occupy 12M SF of office space by 2022
Estimated Employees: 800Projection: New building has room for growth to 1,390Location: Pioneer Square- Moved from long time HQ home in Federal Way
Estimated Employees: 3,500 Projection: 4,500 in 2019Location: Seattle (Interbay)- Moving Bellevue campus to Seattle, new location 12M SF total
Estimated Employees: 1,000 Projection: 5,500 by 2018Location: South Lake Union-- Dexter Station has room for 1,000 more employees - New lease at 1101 Westlake has room for 1,000 more - New lease at Arbor Blocks has room for 2,500 more
Estimated Employees: 1,900Projection: 6,358 by 2019Location: South Lake Union, Fremont and Kirkland- Approaching 1M SF in the region
Estimated Employees: 68,000Projection: 80,479 in 2028Location: University District- Master plan released with plans that anticipate up to 6M SF of space by 2028
Estimated Employees: 1,600Projection: 4,500 by 2020Location: Seattle (Interbay) and Bellevue- Looking to move HQ in Interbay to 500,000 SF from 320,000 SF
Jobs and companies in SeattleKey companies driving job growthLarger tech companies and other headquarters are hiring rapidly to fill their new and expanding office footprints
Living in San Francisco versus Seattle
34
Source: JLL Research
Seattle paychecks go furtherSeattle leads the country in highest paid VP of engineering and director of product in a tech company
Category Seattle San Francisco
Average Tech Engineer Salary $108,240 $110,554
State Income Tax $0 $10,282
Federal Income Tax $23,344 $23,992
1 BD High-rise Apartment per Year $33,600 $50,400
Disposable Income $51,296 $25,881
Tech firms from the San Francisco/Bay Area are seeking
more economical value on office space rents in Seattle
New to Seattle in 2016Pinterest, Airbnb, mixpanel,
Planet, Stripe
2016 4Q Office Vacancy Seattle-Bellevue 9.2%San Francisco 8.2%
Average Office Rent Seattle-Bellevue $34.90San Francisco $73.65
Office SF Under Construction Seattle-Bellevue 5.9MSan Francisco 5.8M
2/16/2017
18
Renting versus buyingAverage mortgage payment versus average rent throughout the Seattle metro area
Home ownership is more expensive than renting in major Seattle cities
Snohomish CountyAvg Rent: $1,297Avg Rent 2012+: $1,575Median Home Value: $477,413Mortgage: $2,522
South King CountyAvg Rent: $1,237Avg Rent 2012+: $1,642Median Home Value: $337,941Mortgage: $1,942
EastsideAvg Rent: $1,804Avg Rent 2012+: $1,966Median Home Value: $717,871Mortgage: $4,129
North SeattleAvg Rent: $1,521Avg Rent 2012+: $1,785Median Home Value: $568,675Mortgage: $3,288Seattle Core
Avg Rent: $1,945Avg Rent 2012+: $2,253Median Home Value: $627,881Mortgage: $3,622
Source: Mortgages calculated based on a 30-year loan, 3.85% interest rates, 1.25% property tax, 0.5% PMI
COPYRIGHT © JONES LANG LASALLE IP, INC. 2016
Thank you
David YoungMultifamily Managing [email protected]
Corey MarxMultifamilyManaging [email protected]