U.S. Economic & Market Commentary - QuadrantREAquadrantrea.com/quadrant/wp-content/uploads/2017/02/Q4...U.S. ECONOMIC & MARKET COMMENTARY 4 th Quarter 2016 Quadrant Real Estate Advisors

Quadrant Real Estate Advisors LLC

U.S. Economic & Market Commentary 4th Quarter 2016

www.quadrantrea.com

ATLANTA DUBLIN LONDON SYDNEY

Kurt Wright, CFA Chief Executive Officer

(770) 752-6713 [email protected]

mailto:[email protected]

U.S. ECONOMIC & MARKET COMMENTARY 4th Quarter 2016

Quadrant Real Estate Advisors LLC 1 www.quadrantrea.com

Table of Contents

Executive Summary…………………………………………………………………………………………………………………….. ....2

State of the U.S. Economy………………………………………………………………………………………………………….. ....3

Commercial Real Estate Market Relative Value….…………………………………………………………………….. .…7

Commercial Real Estate Market Quadrants………….…………………………………………………………………….. .…8

Public Debt Market Review………………………………………………………………………………………………………… ...9

Public Equity Market Review………………………………………………………………………………………………………. ..12

Private Debt Market Review………………………………………………………………………..……………………………… ..14

Private Equity Market Review……………………………………….……………………………………………………………. ..17

Property Sector Updates & Outlooks……..…………………………………………………………………………………… ..20

Contacts & Important Disclosures.……………………………………………………………………………………………… ..30

About Quadrant Real Estate Advisors

Quadrant Real Estate Advisors LLC (“Quadrant”) is a United States SEC registered investment adviser

and Australian Securities and Investments Commission (ASIC) Foreign Registered Corporation (ABN

39 123 863 963). QREA Europe LLP ("QREA") is a subsidiary of Quadrant. QREA Europe LLP

(registration number 610613) is authorized and regulated by the Financial Conduct Authority.

Quadrant has approximately $8.0 billion of commercial and multifamily real estate investments

under management on behalf of institutional investors. Clients include insurance companies,

pension funds, sovereign wealth management funds, and high net worth investors.

Since 1993 Quadrant’s senior management has worked together as a team providing the firm’s

clients with access to both privately placed and publicly traded U.S. commercial real estate debt and

equity investments through commingled funds and single client accounts. In addition to experience,

senior management controls 100% of the firm, thereby providing true alignment of interests and

accountability.



Executive Summary

Annualized Gross Domestic Product (“GDP”) growth increased 1.9% in the fourth quarter of 2016,

down from 3.5% (revised) in the third quarter of 2016.

U.S. nonfarm payroll employment increased by 495,000 jobs during the quarter, bringing total

employment up to 145.3 million public and private employees.

Per the US Census Bureau, 2016 single-family housing starts were up 9.3% over 2015, bringing the

number of starts to a post-cycle high.

The Federal Reserve (the “Fed”) increased the targeted federal funds rate (“Fed Funds Rate”) a

quarter percentage point to 0.50% - 0.75% at its December 2016 Federal Open Market Committee

(“FOMC”) meeting. This marks the second rate increase in a decade, and additional increases are

widely expected in 2017.

Key Economic Indicators

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Bloomberg. Forecasts represent consensus estimates.

Commercial real estate fundamentals remain strong.

Competition among non-bank lenders for commercial mortgages remains high for high quality

loans. CMBS and bank lenders continue to be less active as they adjust to regulatory pressures.

CMBS 60+ day delinquencies (including liquidations) were at 5.08% in December. Comparatively,

life insurance companies reported a delinquency rate of 0.08% (as of September, 2016).

CRE benchmark performance (ascending by standard deviation):

Source: Giliberto-Levy, NCREIF, Barclays, Bloomberg, Wells Fargo, NAREIT Note: NPI yield represents the Q2 2016 net income return, annualized. TR = Total Return, 10 Yr STD (TR) = standard deviation of total returns over the previous ten years

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Real GDP Unemployment CPI 10-Yr UST

Asset Class Index Q4 2016 TR Q4 2016 Y ield 10 Yr STD ( TR)

Private CRE Direct Debt Giliberto-Levy Index -2.48% 4.04% 2.04%

Private CRE Direct Equity NCREIF Property Index ( NPI) 1.73% 4.56% 2.96%

AAA CMBS Barclays Capital AAA CMBS -2.91% 2.66% 4.00%

“Risk F ree” Investment Bof A/ML, UST, Cur 10 Yr -6.81% 2.43% 4.57%

Public CRE Corp Bonds Barclays REIT Bond Index -2.63% 3.59% 5.83%

U.S. Stock Market S&P 500 3.80% 2.09% 8.17%

Public CRE Pfd Stock Wells Fargo REIT PFD -4.21% 6.91% 8.39%

BBB CMBS Barclays Capital BBB CMBS -1.67% 6.27% 11.57%

Public CRE Com Stock NAREIT Equity REITs -2.89% 4.01% 12.79%

Kurt Wright, CFA

Chief Executive Officer

(770) 752-6713

[email protected]

www.quadrantrea.com

ATLANTA DUBLIN LONDON SYDNEY




State of the U.S. Economy

Gross Domestic Product (“GDP”) The GDP advance estimate reported fourth quarter annualized real GDP growth of 1.9%.

Personal consumption expenditures grew by 2.5% in the fourth quarter. Gross private

domestic investment increased by 10.7%.

Exports decreased by 4.3%, while imports increased by 8.3%.

Public sector spending increased 1.2% due to an increase in state and local spending of

2.6%, but was offset by a decrease in federal spending.

Consumer Outlook U.S. consumer sentiment ended the fourth quarter at 98.2 (versus an 89.6 three-year average).

The Federal Reserve reported year-over-year total consumer credit outstanding growth of 6.4% in

December.

Nominal retail sales increased 1.6% quarter-over-quarter, and total sales for 2016 were up 3.3%

from 2015.

Inflation-adjusted per capita retail sales increased 1.2% year-over-year and increased 1.1% over

the prior quarter.

U.S. Consumer Sentiment and Nominal Retail Sales

Source: University of Michigan Survey Research Center, Bureau of Economic Analysis Note: Retail sales represent Total Retail Sales (incl. food & automobile).

Consumer credit levels and single-family home prices are steadily rising, adding further

momentum to consumer-driven economic expansion.

Year-over-year average nominal hourly earnings increases have averaged 2.28% per capita

annually over the past 5 years compared to a 1.31% average annual increase in the CPI over the

same period.

As shown in the graph below, the inflation-adjusted per capita retail sales increased to $859 by

the end of the fourth quarter, returning to pre-recession highs.

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U.S. Consumer Sentiment Rolling 5 Yr. Avg. Consumer Sentiment

Retail Sales Rolling 5 Yr. Avg. Retail Sales



Domestic Inflation and Inflation-Adjusted Per Capita Nominal Retail Sales

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Bloomberg, Census Bureau, Quadrant Real Estate Advisors Note: Retail sales represent Total Retail Sales (including food and automobile). Quadrant has adjusted Total Retail Sales to reflect per capita Total Retail Sales in December 1991 U.S. dollars.

Inflation

Core CPI increased 2.2% during the last twelve months (“LTM”) period through December 2016.

Headline CPI (including food and energy) increased 2.1% during the LTM period.

The Fed increased the targeted Fed Funds Rate a quarter percentage point to 0.50% - 0.75% at its

December 2016 FOMC meeting. This marks the second rate increase in a decade. Inflation is

expected to remain low while it recovers from declines in energy prices and non-energy imports,

but is expected to approach the Fed’s 2.0% target as the labor market strengthens.

Employment U.S. nonfarm payroll employment increased by 495,000 jobs during the fourth quarter.

Indicating net absorption of unemployed job seekers, and resulting in a new record for

total employment of 145.3 million public and private employees.

Although there has been a net gain of jobs since the 2007-to-2009 recession began, the U.S.

population has grown by over 17 million people, and many potential employees who previously

left the workforce (i.e. stopped looking for jobs) may re-enter the job market.

As of December 2016, the labor force participation rate was 62.7%, down from 66.0% at the end

of 2007.

As such, job seekers continue to meet or exceed supply, which has weighed on income gains.

The U.S. unemployment rate decreased quarter-over-quarter from 4.9% to 4.7%.

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Inflation (CPI) Inflation/Population Adj. Retail Sales Rolling 5yr Avg. of Adj. Retail Sales



Total U.S. Non-Farm Payroll Employment (in 000s) through December 31, 2016

Source: Bureau of Labor Statistics * Q3 2016 data is preliminary

U.S. Labor Statistics for the Ten Years Ending December 31, 2016

Source: Bureau of Labor Statistics

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Change in Number of Jobs Unemployment Rate



Interest Rates The targeted Fed Funds Rate increased from 25-to-50 to 50-to-75 bps during the fourth quarter.

The Fed expects continued gradual increases in the Fed Funds Rate.

The ten-year U.S. T-Note yield increased 85 bps during the fourth quarter to 2.5%.

Historical Ten-Year U.S. Treasury Note Yield

Source: Bloomberg

Relative Value of Investments

Excluding Whole Loans (private Sr. Loans), spreads compressed across the board during the fourth quarter.

REIT preferred stock continues to be priced at historically wide spreads; supply continues to be

limited as investors continue to hold.

Source: Giliberto-Levy, NCREIF, Barclays, Bloomberg, Wells Fargo, NAREIT, Quadrant Real Estate Advisors

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10 year UST yield Long Term Average Standard Deviation

Asset Class Index Q3 2016 Q4 2016

Qtr-over-Qtr

Change in bps

Period Yield

"Risk Free" Investment BofA/ML, UST, Cur 10 Yr 1.61% 2.43% 82

Credit Spreads

Whole Loan QREA Proprietary Analysis 235 241 6

Public CRE Corp Bonds Barclays REIT Bond Index 163 155 (8)

Public Corporate Bonds Barclays US Corp. Investment Grade Bonds 141 127 (14)

AAA CMBS Barclays Capital AAA CMBS 75 65 (10)

BBB CMBS Barclays Capital BBB CMBS 418 415 (4)

Private CRE Direct Equity NCREIF Property Index 304 213 (91)

Public CRE Common Stock NAREIT Equity REITs 217 158 (59)

Public CRE Pfd Stock Wells Fargo REIT Pfd 498 447 (51)



Commercial Real Estate Market Quadrants

4th Quarter 2016 Total Returns

Source: Barclays Investment Grade vintage CMBS (Public Debt), NAREIT and Wells Fargo Hybrid & Preferred Securities Equity REIT Index (Public Equity), Giliberto-Levy Commercial Mortgage Performance Index (Private Debt), NCREIF (Private Equity) LTM – Last Twelve Months

Public Debt:

BBB rated CMBS returns eroded during the fourth quarter.

Delinquencies rose to 5.08% in December.

CMBS supply will continue to be materially reduced as CMBS lenders try to adjust to new

regulations.

Per Morgan Stanley, private label CMBS originations ended 2016 at $66 billion, approximately 31%

lower than 2015’s $95.8 billion. Expectations for 2017 originations range from $55-$65 billion.

Demand for high grade CMBS will remain strong.

Public Equity

REIT performance retracted again this quarter, trailing the broad U.S. stock index.

The decline likely resulted from profit taking after REITs posted strong gains during the first half of

2016.

Private Debt

Portfolio lenders continue to have strong demand for high quality loans.

Delinquency rates remain near 0%.

Credit spreads for transitional loans range from approximately 300 to 600 basis points over libor.

Loan coupons for fixed rate first mortgages are in the mid 4% range.

Private Equity:

Performance continues to reflect strong CRE fundamentals.

Cap rates are near or at their lows; however, financing remains inexpensive for high quality

properties.

CRE fundamentals remain solid. Vacancy rates are stable, rents are rising and construction remains

reasonable.

-2.91% -3.08%

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1.73%2.23%

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Public Debt Public Equity Private Debt Private Equity

Total Return - Q4 2016 Total Return - LTM



Public Debt Market Review

Demand Demand for high grade CMBS bonds continues to be strong.

Per the Securities Industry and Financial Markets Association, fourth quarter average daily non-

agency CMBS trading volume was approximately $1.6 billion, up approximately 14% year-over-

year.

The median of primary dealers’ positions in non-agency CMBS was $5.8 billion during the fourth

quarter of 2016, compared to a median of $8.8 billion in the fourth quarter of 2015.

Supply There were 39 new non-agency CMBS issues totaling $24.6 billion priced in the fourth quarter.

The new issues were composed of the following types of deals: 18 conduit pools, 16 single-

borrower deals, 3 floaters, and 2 small business deals.

Total new issuance is approximately 25% below last year’s pace.

Domestic Non-GSE CMBS New Issuance Volume

As of December 31, 2016

Source: Bloomberg

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Pricing Spreads on CMBS 2.0 AAA-rated securities over USD swaps decreased 13 bps, while BBB-rated CMBS

over USD swaps decreased 14 bps.

New Issue CMBS Spreads to USD Swaps


Source: J.P Morgan; Post-2014 Wells Fargo Research.

Refinancing With CMBS conduits being less prevalent in the market, secondary quality loans may struggle to

find refinancing in the near term.

Delinquency/Credit CMBS 60+ day delinquencies (including liquidations) increased to 5.08% in December.

Commercial Mortgage-Backed Securities Delinquency


Source: Morgan Stanley, Solomon Smith Barney, Lehman Brothers, Barclays Capital, Trepp

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Problem Loan Liquidation and Modification Approximately $111.4 billion of securitized mortgage debt was liquidated in 2016, with 8.14%

resulting in losses at resolution.

The average loss severity increased from 31.8% in 2015 to 34.6% in 2016.

OUTLOOK:

Demand from fixed income investors for high grade CMBS is expected to remain strong. Supply,

however is expected to be limited given that CMBS issuers must consider compliance with the newly

enacted risk retention rules.

Public Equity Market Review

Pricing The NAREIT Equity REITs Index dropped 2.89% during the fourth quarter of 2016.

Sector Activity REITs raised $6.1 billion of senior unsecured debt (13 transactions). Secondary offerings of

common equity totaled $2.9 billion, and secondary offerings of preferred equity totaled $1.5

billion. There was one IPO in the fourth quarter, raising $77.0 million.

Performance Public common equity and preferred equity CRE investments (REIT preferred stock) showed a

continued decline in the fourth quarter.

Historical REIT Quarterly Performance Returns

Source: Wells Fargo WHSPR Index (REIT Preferred), NAREIT (REIT Common)

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REIT Common REIT Preferred



REIT Dividend Yields vs. the 10-year U.S. Treasury

January 1990 – December 2016

Source: NAREIT, Bloomberg

Monthly Equity REIT Dividend Yield Spread

January 1990 – December 2016

Source: NAREIT, Bloomberg

OUTLOOK:

Public REIT pricing may continue to be volatile based on concerns of interest rate increases and

unsustainable growth in net operating income.

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10-Year Constant US Treasury Yield FTSE NAREIT Equity REITs Dividend Yield

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Average Yield Spread 1990 - 2016

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Private Debt Market Review

Source: MBA Survey of Commercial/Multifamily Originations, Morgan Stanley Research

As indicated in the charts above, Life Insurance and agency lenders (Fannie Mae and Freddie Mac) have easily taken up the slack from the CMBS conduits since the Global Financial Crisis.

Fundamentals The average life insurance company whole loan delinquency rate as reported by ACLI for the third

quarter of 2016 was 0.08% in contrast to the 5.08% delinquency in the CMBS market.

Historical Delinquency Rates

As of September 30, 2016

Source: ACLI, Barclays Capital

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Commercial Mortgage Loan Delinquency Rate by Geographic Region


Source: ACLI

Sector Activity and Pricing According to the ACLI third Quarter 2016 Commercial Mortgage Commitments report, life

insurance company commercial mortgage lending volume was $17.2 billion, up 15.3% year-over-

year.

Competition remains strong as life insurance companies and other portfolio lenders seek high

quality, conservatively positioned first mortgage loans with strong sponsorship.

Loans with LTVs in the 65-70% range are generally getting quoted at long-term fixed rates of

approximately 4.5% based on property type, loan term, and location.

Life insurance companies remain committed to solid underwriting standards and choose to

compete on rate and flexibility of loan terms rather than compromising on credit.

Fixed Term Commercial Mortgage Commitments Historical Contract Rates


Source: ACLI



Refinancing Demand from portfolio lenders and non-regulated lenders for high quality commercial mortgages

will remain strong.

Borrowers refinancing low quality properties and/or properties located in secondary and tertiary

markets may struggle to find available capital.

Maturing CRE Loans Across Lending Types ($Bn)

Source: Morgan Stanley Research

Performance As illustrated by the Giliberto-Levy Commercial Mortgage Performance Index below, the private

debt investment sector has provided stable long-term income returns.

Source: Giliberto-Levy Commercial Mortgage Performance Index *Periods greater than 1 year are annualized.

OUTLOOK:

Competition for senior loans is expected to remain strong as life insurance companies maintain

substantial commercial mortgage allocations. Opportunities for prudent subordinate debt positions

may increase given the reduction in CMBS originations volume and tighter lending conditions in the

banking sector.

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Gil iberto-Levy Commerc ial Mortgage Performance Index


Income Return Total Return

3 Months 1.09% -2.48%

1 Year 4.60% 3.35%

3 Years* 4.91% 4.45%

5 Years* 5.10% 4.18%

10 Years* 5.69% 5.33%



Private Equity Market Review

Fundamentals Dodge Data and Analytics (“Dodge”) reports that the number of non-residential construction

starts, which excludes multi-family construction, for the year ended December 31, 2016 has

increased 4% year-over-year.

Dodge reports that the value of multifamily construction starts for the year ending December 31,

2016 has grown 3% year-over-year.

The American Institute of Architects (“AIA”) reported that the Architecture Billings Index (“ABI”)

ended the fourth quarter at 55.9. A reading above 50.0 indicates rising demand for design services.

The ABI levels as of the end of the fourth quarter are as follows:

Source: American Institute of Architects

Vacancy rates for industrial and office properties dropped quarter-over-quarter and year-over-

year. Multifamily and Retail vacancy rates slightly decreased year-over-year but remained flat

quarter-over-quarter.

Historical Vacancy Rates by Property Type

Source: REIS

Sector Activity According to Jones Lang LaSalle, fourth quarter private equity real estate transaction volume

totaled $71 billion in the Americas, up 1% year-over-year.

Top MSAs continued to attract significant amounts of capital resulting in high pricing and low cash

yields.

Demand continued to grow for properties in secondary and tertiary markets that exhibited

comparatively high yields.

Similarly, investors continued to seek value-add/redevelopment opportunities in certain markets.

Region of U.S. ABI Level

South 53.8

West 48.8

Northeast 54.0

Midwest 54.4

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Multifamily Industrial Office Retail



Pricing The average capitalization rate, as reported by NCREIF, decreased quarter-over-quarter by 5 bps

to 5.05%. Although nominal cap rates remained low, spreads over the 10-year U.S. T-Note fell to

approximately 260 bps due to the rise in US Treasury yields since the presidential election.

U.S Equity Capitalization Rate Trends

Source: NCREIF

Performance Private Equity Historical Quarterly Performance

Source: NCREIF

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Tota

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OUTLOOK: Transaction activity over the next several years for high quality properties will be supported by relatively inexpensive financing options, global capital (equity and debt) inflows, and strong commercial real estate fundamentals. Nominal cap rates are very low in certain primary markets, which limits near-term valuation upside for stabilized assets in these markets. The spread between primary and secondary markets has begun to tighten as investors seek yield beyond the top CBD markets, although that phenomenon may be short lived as financing becomes less plentiful in those markets. The historically high cap rate spread over U.S. T-Notes provides a buffer to rising benchmark interest rates in the near term, which limits rate-driven downside valuation risk. Furthermore, any incremental increase in inflation, which Quadrant expects to be a prerequisite for the Fed to begin material interest rate increases, should support rising long-term CRE private equity valuations as rents and construction costs rise (i.e. increasing income and limiting new supply).

Property Sector Updates & Outlooks

Market Overview The broad outlook for U.S. commercial real estate fundamentals is generally positive for the five

primary property sectors.

2016 Commercial Real Estate Fundamentals Forecasts

Source: Quadrant Real Estate Advisors Grey areas represent information that is not applicable to the property sector.

Debt and equity capital is plentiful, which continues to drive debt and equity transaction volume.

In turn, cash yields remain relatively low for both lenders and equity investors. Although, in the 4th

quarter, fixed rate lenders enjoyed higher yields driven by the run up in treasury yields since the

presidential election.

Office Multifamily Retai l Industrial Hotel

Rent Growth

Vacancy

Net Absorption

ADR Growth

RevPar

Occupancy

Property Sector



The following chart exhibits Quadrant’s view of the U.S. commercial real estate market’s current

positioning in the market cycle.

Commercial Real Estate Cycle (numbers reference the corresponding table sections)

Source: Quadrant Real Estate Advisors

Recovering Expanding Overheating Weakening

Sector Fundamentals Sector Fundamentals Sector Fundamentals Sector Fundamentals

N/A 1. Multifamily N/A N/A

Capital Markets 2. Hotel Capital Markets Capital Markets

N/A 3. Industrial D. Equity Pricing N/A

4. Office

5. Retail

Capital Markets

A. Equity Availability

B. Debt Pricing

C. Debt Availability

Growth Phase Decline Phase

1

2

3

4

5

A D

B

C



Office Market supply:

At 8.5 million square feet, fourth quarter completions were 8.2% higher than the prior

quarter, but 23.6% lower year-over-year.

Office Completions (sf)

Source: REIS

Absorption and vacancy:

Net absorption was 14.1 million square feet in the fourth quarter versus 16.1 million

square feet a year ago. The five-year average net absorption per quarter is 7.7 million

square feet.

Vacancy decreased 20 bps from the prior quarter to 15.8%. Year-over-year, vacancy

declined 40 bps.

Office Absorption and Vacancy

Source: REIS

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Sq.

Ft.)

Net Absorption Vacancy



Rental rates:

Year-over-year rent growth declined 50 bps to 2.3% in the fourth quarter.

Office Rent % Change

Source: REIS

OUTLOOK:

The office sector outlook remains positive; however, cap rates will eventually be impacted if Treasury

rates rise significantly. There is currently a buffer, but at a point cap rates must give way to higher

treasury yields. CBD office assets located in core markets should continue to exhibit low vacancy,

strong rent growth, and significant capital availability.

0.0%

1.0%

2.0%

3.0%

4.0%

Ch

an

ge in

Ren

t p

er

Sq. F

t. p

er

Year



Industrial Market supply:

Completions in the fourth quarter of 2016 were 14.5 million square feet, down 11.2%

from the prior quarter and down 25% year-over-year.

The five-year quarterly average is 14 million square feet.

Industrial Completions (sf)

Source: REIS. Note the above data reflects only properties classified by REIS as “Warehouse” and “Distribution” facilities.


Net absorption was 26 million square feet for the quarter, an increase of 9.5% year-over-

year. The five-year average net absorption per quarter is 21 million square feet.

The vacancy rate decreased by 20 bps year-over-year to 10.3% in the fourth quarter.

Industrial Absorption and Vacancy

Source: REIS

0

5,000

10,000

15,000

20,000

25,000

30,000

Squ

are

Fe

et

(in

th

ou

san

ds)

Average Completions 14 million sf

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Vac

ancy

Ne

t A

bso

rpti

on

(in

th

ou

san

ds

of

Sq.

Ft.)




Rental rates:

Year-over-year rent growth remained flat at 2.2% in the fourth quarter.

Industrial Rent % Change

Source: REIS

OUTLOOK:

The outlook for 2017 remains favorable as the U.S. economy continues to post employment gains,

driving increased consumer spending which ultimately leads to increased need for warehouse and

distribution facilities. Net absorption will likely continue to soften as new developments are

completed, but overall fundamentals are expected to remain strong.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Ch

ange

in

Re

nt

pe

r Sq

. Ft

. pe

r Y

ear



Retail Market supply:

Fourth quarter 2016 completions in the retail sector were down 21.6% year-over-year

to 2.1 million square feet, falling slightly below the 2.2 million square foot five-year

quarterly average.

Retail Completions (sf)

Source: REIS. Note REIS reports only properties defined as “Neighborhood Centers” and “Community Centers” in its aggregated retail data. This subset is viewed as a proxy for the greater retail market.


Net absorption during the fourth quarter was 3.3 million square feet, which is up 24.1%

year-over-year and above the five-year average absorption of 3 million square feet.

Vacancy remained relatively flat compared with the prior quarter at 9.9%. Year-over-

year, vacancy declined 10 bps.

Retail Absorption and Vacancy

Source: REIS

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Squ

are

Fe

et

(in

th

ou

san

ds)

Net Completions Avg Completions

Average Completions 2.2 million sf.

9.20%

9.40%

9.60%

9.80%

10.00%

10.20%

10.40%

10.60%

10.80%

11.00%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Vac

ancy

Ne

t A

bso

rpti

on

(in

th

ou

san

ds

of

Sq.

Ft.)




Rental rates:

Year-over-year rent growth declined 20 bps to 1.9% in the fourth quarter.

Retail Rent % Change

Source: REIS

OUTLOOK:

The most pressing long-term risk for the retail sector is online retail incentivizing customers to stay

out of stores. Given localized soft spatial demand, new construction is expected to remain muted,

which will likely drive vacancy rates lower due to a combination of net absorption and destruction of

older, obsolete properties. Rental rate growth prospects will remain highly fragmented by location,

asset quality, and property subsector.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Ch

ange

in

Re

nt

pe

r Sq

. Ft

. pe

r Y

ear



Multifamily Market supply:

Net completions in the fourth quarter of 2016 totaled 46,216 units (gross), a year-over-

year decrease of 19.4%.

The AIA reports that the multifamily sector is increasing, ending the fourth quarter with

an ABI level of 50.6; however, that level is lower than all other sectors.

Multifamily Completions (Units)

Source: REIS


Net absorption in the fourth quarter was 42,690 units, a decrease of 6.4% year-over-

year and just below the five-year average absorption of 43,932 units.

Vacancy remained relatively flat year-over-year at 4.2%.

Multifamily Absorption and Vacancy

Source: REIS

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Nu

mb

er

of

Un

its

Average Completions 40,883 units

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Vac

ancy

Ne

t A

bso

rpti

on

(in

un

its)




Rental rates:

Year-over-year rent growth declined in the fourth quarter from 4.4% to 3.6%.

Multifamily Rent % Change

Source: REIS

OUTLOOK:

Demographic trends are expected to support continued residential rental demand on a near-to-

intermediate term basis. Furthermore, tight single family and condominium residential mortgage

loan underwriting standards continue to limit homeownership demand.

Multifamily development remains fundamentally attractive in select markets, but as pipelines

continue to grow nationally, certain regions appear poised for oversaturation, which could cause

underperformance of rental rates and occupancy assumptions. Thus, vacancy rates may trend

slightly higher in upcoming quarters.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Ch

ange

in

Re

nt

pe

r U

nit

pe

r Y

ear



Hotels Market demand:

Lodging demand remains robust.

According to STR the U.S. hotel industry’s occupancy in the fourth quarter remained

relatively flat year-over-year at 65.5%, due to significant new construction.

Market supply:

According to the December 2016 STR Pipeline Report, the total active hotel development

pipeline (by number of rooms) was up 19.4% year-over-year.

The In-Construction metric was up 32.9% year-over-year.

The total active pipeline included projects in the In-Construction, Final Planning, and

Planning stages, but it did not include projects in the Pre-Planning stage.

Key metrics:

According to STR, RevPAR increased 3.2% year-over-year to $81.19.

Similarly, ADR increased 3.1% year-over-year to $123.97.

OUTLOOK:

Economic improvement and upward trending consumer sentiment are expected to support further

RevPAR, ADR, and occupancy improvement in the near-term. However, RevPAR and ADR growth

may slow and fall negative as new supply comes on line. Given the hotel sector’s particularly high

correlation to the broad economic environment and business/consumer sentiment, downside risk is

primarily tied to the risk of slowing GDP growth and/or geopolitical threats that could affect both

business and leisure travel.



Contacts

United States:

Thomas Mattinson

Executive Vice President

+1 (1) 770 752 6714

[email protected]

U.K. & Europe:

Linda Nel

Senior Vice President

+1 (1) 770 752 6726

[email protected]

Australia:

Evan Goldszak

Vice President

+61 (0) 2 9917 8303

[email protected]

Important Disclosures

This report is for informational purposes only and does not constitute, form, nor should be construed

as an offer to sell or a solicitation of an offer to buy investments or any fund and does not constitute

any commitment or recommendation on the part of Quadrant Real Estate Advisors. An investment

offering will be made only through a confidential private offering memorandum subject at all time to

revision and completion.

The information contained herein is derived from various sources which Quadrant believes but does

not guarantee to be accurate as of the date hereof. Neither Quadrant nor any of its affiliates nor any

other person makes any representation or warranty, express or implied, as to the accuracy or

completeness of the information contained in this newsletter and nothing contained herein shall be

relied upon or construed as a promise or reorientation of past or future performance.




Documents

U.S. Economic & Market Commentary - QuadrantREAquadrantrea.com/quadrant/wp-content/uploads/2017/02/Q4...U.S. ECONOMIC & MARKET COMMENTARY 4 th Quarter 2016 Quadrant Real Estate Advisors