Presentation: Commercial Real Estate Outlook

8/12/2019 Presentation: Commercial Real Estate Outlook

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Commercial Real Estate Outlook:NOT AS BRIGHT AS THE PICTURE--BUT STILL EXPANDING

Lawrence Yun, Ph.D.

Chief Economist

NATIONAL ASSOCIATION OF REALTORS

Presentation in Washington, D.C.

May 15, 2014


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GDP Contraction

in 2014 Q1

-10

-8

-6

-4

-2

0

2

4

6

2007

- Q1

2007

- Q3

2008

- Q1

2008

- Q3

2009

- Q1

2009

- Q3

2010

- Q1

2010

- Q3

2011

- Q1

2011

- Q3

2012

- Q1

2012

- Q3

2013

- Q1

2013

- Q3

2014

- Q1

GDP Annualized Growth Rate


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But No Fresh Recession in Sight

-5

-4

-3

-2

-1

0

1

2

3

4GDP Growth Rate from one year ago


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Sluggish Growth + Gap after Great Recession($1.5 trillion gap $4,700 per person)

10000

11000

12000

13000

14000

15000

16000

17000

18000

1998 - Q1 2000 - Q1 2002 - Q1 2004 - Q1 2006 - Q1 2008 - Q1 2010 - Q1 2012 - Q1

GDP in 2009 Dollars

Real GDP Real GDP W/O Recession

3% Growth Line

2.2% Growth Line


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GDP Growth = Job Creations(8 million lost 8 million gained)

124000

126000

128000

130000

132000

134000

136000

138000

140000

2000-Jan

2000-Jul

2001-Jan

2001-Jul

2002-Jan

2002-Jul

2003-Jan

2003-Jul

2004-Jan

2004-Jul

2005-Jan

2005-Jul

2006-Jan

2006-Jul

2007-Jan

2007-Jul

2008-Jan

2008-Jul

2009-Jan

2009-Jul

2010-Jan

2010-Jul

2011-Jan

2011-Jul

2012-Jan

2012-Jul

2013-Jan

2013-May

2013-Nov

In thousands


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Local Market Job ComparisonsFast Growing

States

1-year Growth

RateNevada 3.8%

North Dakota 3.7%

Colorado 3.0%

Florida 3.0%

Oregon 2.7%

Texas 2.7%

Utah 2.6%

Delaware 2.4%

California 2.3%

Arizona 1.9%

Slow Moving

States

1-year Growth

RateNew Mexico -0.2%

Kentucky -0.2%

New Jersey 0.0%

Virginia 0.1%

Alaska 0.2%

West Virginia 0.3%

Pennsylvania 0.3%

Maryland 0.3%

D.C. 0.4%

Mississippi 0.5%


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Commercial Investment Sales of Large Properties(Properties valued at $2.5 million and over)

130

212

362

423

571

174

67

147

233299

355

400420 430

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Commercial Sales in $Billions


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Green Street Price Index

Charting New Highs

0

20

40

60

80

100

120

2000-Jan

2000-Jul

2001-Jan

2001-Jul

2002-Jan

2002-Jul

2003-Jan

2003-Jul

2004-Jan

2004-Jul

2005-Jan

2005-Jul

2006-Jan

2006-Jul

2007-Jan

2007-Jul

2008-Jan

2008-Jul

2009-Jan

2009-Jul

2010-Jan

2010-Jul

2011-Jan

2011-Jul

2012-Jan

2012-Jul

2013-Jan

2013-Jul

2014-Jan


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NCREIF Price Index(Only Apartments Setting New Highs)

0

50

100

150

200

250

300

350

2000-Q1

2000-Q3

2001-Q1

2001-Q3

2002-Q1

2002-Q3

2003-Q1

2003-Q3

2004-Q1

2004-Q3

2005-Q1

2005-Q3

2006-Q1

2006-Q3

2007-Q1

2007-Q3

2008-Q1

2008-Q3

2009-Q1

2009-Q3

2010-Q1

2010-Q3

2011-Q1

2011-Q3

2012-Q1

2012-Q3

2013-Q1

2013-Q3

Apartment Industrial Office Retail


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Price Increases Supported

by Rising Rents and Low Interest Rates


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Cap Rates and Treasuries: Large Gap

0%

1%

2%

3%

4%

5%6%

7%

8%

9%

10%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

10yr UST* Cap Rate


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REALTOR Markets & Deal Size

(Not $2.5 million Properties)

21%

22%

26%

17%

12%

1%

2%

< $250,000

$250,000 - $500,000

$500,000 - $1,000,000

$1,000,000 - $2,000,000

$2,000,000 - $5,000,000

$5,000,000 - $10,000,000

> $10,000,000

2013 CRE Lending Survey: Value of most recent sales transaction

Source: NAR


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Cap Rates: A Number of Markets

8.3% 8.2%8.5%

7.5%

8.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Office Industrial Retail Apartment Hotel

Cap Rates

Major Markets (RCA) REALTOR Markets (NAR)

Sources: NAR, Real Capital Analytics


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NAR Member Commercial Activity

Survey

1st

Quarter, 2014 Sales Volume Compared with Previous Year:

Up 11%

Sales Prices Compared with Previous Year:Up 4%

Rental Rates Compared with Previous Quarter:Up 2%

Direction of Business Opportunities Comparedwith Previous Quarter: Up 6%


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Monetary Policy

Tapering Ends by the year end 2014

Fed Funds Rate hike in 2015 Q1

Earlier Move to Tighten because of InflationPressure

Long-term Steady State Rate (2016 onwards).. 10 year Treasury at 5.0% 250 basispoints higher than current


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Monetary Policy by Federal Reserve

(zero rate policy for 6 years!)

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Fed Funds%


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New Construction Activity - Recovering

(Not a New High Yet)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2000-Jan

2000-Jul

2001-Jan

2001-Jul

2002-Jan

2002-Jul

2003-Jan

2003-Jul

2004-Jan

2004-Jul

2005-Jan

2005-Jul

2006-Jan

2006-Jul

2007-Jan

2007-Jul

2008-Jan

2008-Jul

2009-Jan

2009-Jul

2010-Jan

2010-Jul

2011-Jan

2011-Jul

2012-Jan

2012-Jul

2013-Jan

2013-Jul

2014-Jan

Non-Residential Construction in $Millions


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Consumer Price Inflation: Less than 2%(% change from one year ago)

-3

-2

-1

0

1

2

3

4

5

6

199

9-Jan

1999-Jul

200

0-Jan

2000-Jul

200

1-Jan

2001-Jul

200

2-Jan

2002-Jul

200

3-Jan

2003-Jul

200

4-Jan

2004-Jul

200

5-Jan

2005-Jul

200

6-Jan

2006-Jul

200

7-Jan

2007-Jul

200

8-Jan

2008-Jul

200

9-Jan

2009-Jul

201

0-Jan

2010-Jul

201

1-Jan

2011-Jul

201

2-Jan

2012-Jul

201

3-Jan

2013-Jul

201

4-Jan

CPI: Year Over Year Percent Change

All items exlcuding fuel and energy All items


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Core Price Inflation: Less than 2%;

but rose at 2.5% annualized rate(% change from one year ago)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1999-Jan

1999-Jul

2000-Jan

2000-Jul

2001-Jan

2001-Jul

2002-Jan

2002-Jul

2003-Jan

2003-Jul

2004-Jan

2004-Jul

2005-Jan

2005-Jul

2006-Jan

2006-Jul

2007-Jan

2007-Jul

2008-Jan

2008-Jul

2009-Jan

2009-Jul

2010-Jan

2010-Jul

2011-Jan

2011-Jul

2012-Jan

2012-Jul

2013-Jan

2013-Jul

2014-Jan

All items exlcuding fuel and energy


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Apartment Vacancy RatesHistoric Lows Now

5.7

5.3

4.9

5.2

Avg Vacancy Rates,

2003-13

Avg Vacancy Rates,

Past 19 Years

Vacancy Rate 2013 Forecasted Vacancy

Rates, 2014-16


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Industrial SpaceTends to be Warehouses, Flex Space

11.9

10.3

11.3

10.4

Avg Vacancy Rates, 2003-

13

Avg Vacancy Rates, Past

20 years

Vacancy Rate, 2013 Forecasted Vacancy Rates,

2014-16

Industrial: Average Vacancy RatesSource: Urban Land Institute


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Commercial Office BuildingsVacancies Projected to Decline

14.9

14.1

14.9

13.7


13

Avg Vacancy Rate, Pst 20

Years


2014-16

Offices: Average Vacancy RatesSource: Urban Land Institute


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Retail: Vacancy Rates

10.59.8

12.0

11.1


13

Avg Vacancy Rate, Pst 20

Years


2014-16

Retail: Average Vacancy RatesSource: Urban Land Institute


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Forecast over the next 2 years

GDP Growth near 3%

Net New Jobs about 2 million a year

Rising interest rates

10-year Treasury to reach 4% by late 2015

Cap rates rise somewhat (narrow the gap first) Increased occupancy and falling vacancy (new

supply lacking)

Rising rents

Overall improving business opportunities


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Economic Forecast

2011 2012 2013 2014 2015

Annual Growth Rate

Real GDP 1.8 2.8 1.9 2.2 2.9

Employment 1.2 1.7 1.7 1.6 1.9

Unemployment 8.9 8.1 7.4 6.5 6.3

Interest Rates

3-Month Treasury 0.1 0.1 0.1 0.1 0.8

10-Year Government Bond 2.8 1.8 2.5 3.0 3.8


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Commercial ForecastOFFICE 2014 I 2014 II 2014 III 2014 IV 2015 I 2015 II 2015 III 2014 2015

Vacancy Rate 15.8% 15.8% 15.7% 15.5% 15.6% 15.5% 15.4% 15.7% 15.5%

Net Absorption ('000 sq. ft.) 10,880 10,787 11,745 11,144 11,400 12,727 13,515 44,556 50,024Completions ('000 sq. ft.) 6,232 7,457 6,085 6,249 8,033 9,220 8,392 26,023 33,917

Rent Growth 0.5% 0.6% 0.6% 0.6% 0.7% 0.8% 0.9% 2.3% 3.2%

INDUSTRIAL 2014 I 2014 II 2014 III 2014 IV 2015 I 2015 II 2015 III 2014 2015

Vacancy Rate 9.0% 8.9% 8.9% 8.9% 8.9% 8.7% 8.6% 8.9% 8.7%

Net Absorption ('000 sq. ft.) 19,098 26,525 31,831 28,648 19,914 27,658 33,190 106,102 110,632

Completions ('000 sq. ft.) 14,865 21,943 20,527 13,449 14,383 21,233 19,863 70,784 68,492

Rent Growth 0.5% 0.6% 0.6% 0.7% 0.6% 0.7% 0.7% 2.4% 2.6%

RETAIL 2014 I 2014 II 2014 III 2014 IV 2015 I 2015 II 2015 III 2014 2015

Vacancy Rate 10.2% 10.0% 10.0% 9.8% 9.9% 9.8% 9.8% 10.0% 9.8%

Net Absorption ('000 sq. ft.) 4,045 3,417 2,590 4,591 5,776 4,880 3,699 14,643 20,910

Completions ('000 sq. ft.) 2,565 2,239 2,565 2,847 3,689 3,188 3,581 10,216 14,115

Rent Growth 0.4% 0.5% 0.5% 0.6% 0.5% 0.6% 0.6% 2.0% 2.3%

MULTI-FAMILY 2014 I 2014 II 2014 III 2014 IV 2015 I 2015 II 2015 III 2014 2015

Vacancy Rate 4.0% 4.0% 4.0% 4.1% 4.1% 4.1% 4.2% 4.0% 4.1%

Net Absorption (Units) 50,333 45,491 42,940 58,167 27,721 25,055 23,650 204,931 112,463

Completions (Units) 32,164 42,931 41,765 44,781 27,728 35,219 32,162 161,640 129,238

Rent Growth 1.4% 1.2% 1.1% 1.0% 1.0% 0.9% 0.9% 4.3% 3.5%

Sources: National Association of REALTORS / Reis, Inc.

Washington Policy Watch on


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Washington Policy Watch on

Commercial Real Estate

Facilitate Covered Bonds to help credit flow

Raise cap on holding of commercial RE loans by

credit unions

Preserve Like-Kind Exchanges

Preserve Terrorism Insurance

Preserve capital gains status on carried interest

Depreciation Rules should match economic life

Oppose lease-accounting changes


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For Daily Update and Analysis

Twitter@NAR_Research


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Commercial Real Estate Outlook:NOT AS BRIGHT AS THE PICTURE--BUT STILL EXPANDING

Lawrence Yun, Ph.D.

Chief Economist

NATIONAL ASSOCIATION OF REALTORS

Presentation in Washington, D.C.

May 15, 2014


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Source: CoStar, NGKF

-20

-15

-10

-5

0

5

10

15

20

25

'07 '08 '09 '10 '11 '12 '13 '14

MillionSF

CBD Suburban

Office Market Absorption, CBD vs. SuburbanSuburbs Are Alive and Well

Since 2007, net

absorption in CBDs has

been negative!

Excluding quarters

with negative

absorption, suburbs

have accounted for

80% of totalabsorption since 2007.

ll d l


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0

200

400

600

800

1,000

Original 6 CBDs Other 53 CBDs

MillionsofSF

Office Inventory

$0

$5

$10

$15

$20

$25

$30$35

$40

$45


PerSFPerYearGross

Office Asking Rent

0%2%

4%

6%

8%

10%

12%

14%

16%18%


Office Vacancy Rate

0%

2%

4%

6%

8%


Office Cap Rate


Not All CBDs Created EqualNY, DC, Boston, Chicago, SF, Seattle (Original 6) vs. All Others

d l k


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0%

2%

4%

6%

8%

10%

12%

-75

-50

-25

0

25

50

75

'07 '08 '09 '10 '11 '12 '13 '14

%Vacant

SFAbsor

bed/Completed(millions

)

SF Absorbed SF Completed % Vacant

Q1 Vacancy of 7.7% ties pre-

recession low in 2007-Q1.

Y/Y vacancy fell 200-plus bps in

Fresno, Las Vegas, Columbus,

Denver & Charlotte, more than

twice the 85-bps drop in U.S.

Construction pipeline = 94M SF,

52% of prior peak in 2007-Q3.

Q1 net absorption hit 6-year high of

47M SF, led by DFW w/4.2M SF.

Asking rent rose 5.1% Y/Y.

Recovery has spread to regional

markets with less new supply.

Industrial MarketDrivers = E-Commerce, Cap-ex, Trade, Supply Chain Optimization

CRE L M i 2012 2022


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Source: Trepp with Federal Reserve Flow of Funds Data, NGKF

$0

$50

$100

$150

$200

$250

$300

$350

$400

'12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22

Billions

Bank CMBS Insurance Companies Other

CRE Loans Maturing 2012-2022CMBS Still Problematic

Maturing loans will remain

elevated for three more years.

CMBS maturations will peak in

2017.

Delinquency rates are going down

for all loan types.

With leasing market conditions

improving, there appears to be

plenty of debt capital available to

refinance the loans.


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NATIONAL ASSOCIATIONOF REALTORS

The Evolution of Office SpaceMay 15, 2014 | Washington, DC


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39

COST IS IMPORTANT

RealEstate

Labor

Cost of Doing Business

55%surveyed

plan reductions

Real Estate Cost Reductions

40 million sq. ft.

Price Sensitivity

225 sf

151 sf

2010 2017f

Sq. Ft. per Worker

Sources: CBRE, CoreNet Global.


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40

1 7

Major Business Drivers for Alternative Workplaces

ITS NOT ALL ABOUT COST

1

CostSavings

76%

2

Work-LifeBalance

66%

3Productivity

64%

4

BusinessAgility

61%

5

EmployeeAttraction/Retention

59%

6Collaboration

47%

7Sustainability

41%

Source: NewWOW.

2011 Survey

4

CostSavings

58%

Work-LifeBalance

70%

2

Productivity

69%

5

BusinessAgility

56%

3

EmployeeAttraction/Retention

60%

6Collaboration

49%

Sustainability

29%

2013 Survey


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41

CBRE Downtown Los Angeles

FLEXIBILITY & CHOICE


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42

Clustering of Tech Talent

ATTRACTING TALENT

Sources: BLS, CBRE Research.


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43

Demographics Impact the Workplace

THE NEXT GENERATION

THE TRADITIONALISTS

(BABY BOOMERS, GEN X)

THE NEW GENERATION

(GEN Y OR MILLENNIALS)

Dedicated Space Choice in where we work

Face-to-face interactions Face-to-face + collaboration & media tools

Stationary technology Mobile technology

Independence & hard work Collaboration & team work

Work is about obligation and challenges Work is about fulfillment

Health & retirement benefits Work-life balance

Top down or consensus driven decision making Speedy decision making

Source: CBRE Workplace Strategies.


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Wellbeing & Health

SUSTAINABILITY 2.0


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JEFFREY KOTTMEIERDIRECTOR, RESEARCH & ANALYSIS

T +1 202 783 8200

[email protected]


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http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&docid=YyYSjd2pEPq9-M&tbnid=Otgj_s-SUeyGWM:&ved=0CAUQjRw&url=http://dcmud.blogspot.com/2012/06/lumber-shed-construction-at-yards.html&ei=Jbx0U-DEI8iV8gHR54DoBA&bvm=bv.66699033,d.b2U&psig=AFQjCNHd7utXd5FqYdHwItQLqkhrzKHurQ&ust=1400245647990167


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http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&docid=YyYSjd2pEPq9-M&tbnid=Otgj_s-SUeyGWM:&ved=0CAUQjRw&url=http://dcmud.blogspot.com/2012/06/lumber-shed-construction-at-yards.html&ei=Jbx0U-DEI8iV8gHR54DoBA&bvm=bv.66699033,d.b2U&psig=AFQjCNHd7utXd5FqYdHwItQLqkhrzKHurQ&ust=1400245647990167


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May 2014

Economic & Commercial

Real Estate Outlook

Kevin J. Thorpe, Chief Economist


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NABEs Consensus Forecast

Released: March 2014

2014 Forecast 2015 Forecast

Median

FiveLowest

FiveHighest

MedianFive

LowestFive

Highest

Real GDP, % change, Q4/Q4 2.7 1.5 3.5 3.2 2.3 3.8

CPI, % change, Q4/Q4 1.9 1.4 2.4 2.0 1.2 2.8

Civilian Unemployment Rate, % annualaverage

6.4 6.3 6.8 6.1 5.5 6.6

Federal Funds Target, % year-end 0.125 0.125 0.500 .750 0.125 2.000

10-Yr Treasury Note Yield, % year-end 3.30 2.72 3.75 3.80 2.95 4.44

Housing Starts, millions of units 1.07 0.91 1.20 1.30 0.99 4.50

Home Prices, FHFA, % change, Q4/Q4 5.0 1.8 9.3 4.0 1.3 6.7

Oil Prices, $ per barrel, December Average 99 90 105 100 85 111

S&P 500 Index, December 31 1950 1800 2028 2047 1800 2318


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Springing Back

Job Growth

Home Sales

Auto Sales

ISM

+288k(April)

+3.4%

(March)

16.4M(March)

54.9(April)

(Mth/Mth)

(PHI, Monthly)

(Monthly)


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CRE Demand Metrics

0

20

40

60

80

100

120

140

160

180

Retail (msf) Office(msf) Industrial (msf) Apartments, 000's

2007 2013 Pre-Recession Average

Source: Cassidy Turley Research, Reis

U.S. Net Absorption in 2013 vs. Pre-recession Annual Averages


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CREFraught With Nuances


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Tenants Signing For Less Space

Changes In Office SF Per Worker

225

164

151

150

160

170

180

190

200

210

220

230

2010 2011 2012 2013 2014 2015 2016 2017

Source: CoreNet Global

Office space per worker, sf


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High Quality Is King

-20

0

20

40

60

80

2011 2012 2013

MSF

Class A Net Abs. Class B Net Abs. Total Pre-Crisis AverageSource: Cassidy Turley Research

U.S. Office Sector


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Is Multifamily Overbuilding?

0

50,000

100,000

150,000

200,000

250,000

#ofUnits

Completions

Forecast

Recovery

Absorption

Historical

Absorption

Source: Reis, Cassidy Turley Research


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Industrial Is Underbuilding

Industrial: Spread between current vacancy & historical average

Source: Cassidy Turley Research

Raleigh

Columbus

Austin

Charlotte

Dallas

Louisville

Pittsburgh

Indianapolis

Baltimore

Denver

Minneapolis

San Diego

Central NJ

Atlanta

Milwaukee

Cincinnati

Sub MD

Chicago

Houston

Philadelphia

Saint Louis

Nashville

-500 -400 -300 -200 -100 0 100


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Prime Retail Rents Surging

2%

6%

8%

10%

17%

19%

22%

31%

32%

42%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Los Angeles (West)

St. Louis (Clayton)

San Diego (Del Mar)

Bethesda, MD

Chicago (N. Mich Ave)DC (Georgetown)

Atlanta (Buckhead)

NY City (Midtown)

San Fran (Downtown core)

Nashville (Downtown)

Rent Growth, 2013 over 2012

Source: Cassidy Turley Research, Costar


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What Could Go Wrong?

Eurozone deflation

Chinahard landing

Monetary policy fuels hyperinflation

Interest Rates Spike

Russia/Ukraine CrisisGlobal Panic


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Documents

Presentation: Commercial Real Estate Outlook