u.s. commercial real estate market forecast - summer update

The US Commercial Real Estate Market Forecast: Summer Update

July 2014

Auction.com Research

Outlook for US Economy

2

US Growth Should Improve in Coming Years

»  Reduced uncertainty helps spur private sector spending and investment. »  Improving wealth provides tailwind to consumer spending. »  Recovering housing market contributes to growth. »  US energy boom boosts domestic manufacturing and exports. »  Europe slowly pulls out of recession, aiding export volume.

GDP Gradually Accelerates Job Growth Picks Up as Economy Improves

Risks to the Outlook

3

Geopolitical Risks High  

»  Market discounting risk emanating out of Russia »  Potential impact of sanctions/trade disruption on Europe »  Geopolitical instability across many parts of the globe: Europe/emerging markets/Ukraine/Middle

East/Venezuela and Argentina »  Unclear if China growth picks up? Additionally: »  Housing market recovery could stall »  Tapering is not smoothly executed or market reacts poorly to tapering moves/statements »  Tech bubble?

Macro Overview: Growth Slowed in the Winter but Has Thawed

4

Economic Growth Made Significant Headway in 2013, Slowed in 1st Quarter, Now Stronger

Slowdown in GDP reflects the key risks we had identified: »  Housing ebb led to drag from residential investment. »  Slowdown in China and weakness in Japan helped drag down exports, while Europe ex UK still

slow. »  Weather also played a very big role.

GDP Growth Slowed in the First Quarter, Exports, Investment and Weather Were Key Drags

Monthly Job Growth Solid After a Few Weak Months

Lower Uncertainty Could Help Unleash Household Spending and Business Investment

5

High Level of Uncertainty Between 2008 and 2012 Was a Key Impediment to Growth, Lower Uncertainty Will Help Boost Spending and Investment

Sources: Steven Davis, Scott Baker and Nicholas Bloom, Maximus Advisors

Single Family Looks to Be Thawing After Severe Winter

6

After Step Back, Recovery Appears to Be Heating Up

Existing Home Prices Up After Some Softness New and Existing-Home Sales Starting to Pick Back Up

Sources: Census, NAR, Zillow, FHA, S&P, Maximus Advisors

US Households Benefitting from Tailwind of Rising Financial and Residential Wealth

7

Household Wealth Has Surpassed Pre-Financial Crisis Level; Increase in Home Values Played Huge Role in 1st Quarter Increase

Sources: Federal Reserve, Maximus Advisors

Consumer Situation Still Generally Positive

8

Consumer Attitudes and Spending Emerging from Depths of Great Recession and Financial Crisis

Consumer Confidence Emerging from Deep Drop… …Propelling Consumer Spending

Sources: Conference Board, Census, Maximus Advisors

Natural Gas Prices Much Lower in US, Giving Manufacturers a Cost Advantage

9

Estimated Landing Prices Show Natural Gas is Far Cheaper in US

Sources: FERC, Maximus Advisors

Nearly All Major Metros Have Grown Over the Past Year

10

Detroit and DC Only Metros with Employment Down Year Over Year

Sources: BLS, Maximus Advisors

Economic Momentum Heatmap

11

Most Metros Have Good Economic Prospects

Source: Maximus Advisors

•  Economy ratings range from 1 (very strong) to 6 (very weak) based on our analysis of current and near-term economic momentum.

•  Individual box size is based on market population.

Real Estate Capital Markets

Transaction Volume Back to Healthy Level and on a Generally Upward Trajectory

13

Total Deal Volume Ranging at Healthy Level, Up 19% from a Year Ago

Sources: BLS, Maximus Advisors

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$20

$40

$60

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$100

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$160

$18001

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01Q3

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11Q1

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12Q1

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13Q3

14Q1

Deal  Volum

e,  $  Billions

Cap Rates Resisted Upward Interest Rates

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Interest Rates Started to Climb in 2013 but Cap Rates Were Range-Bound to Lower

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3500

0%

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Cap Rates 10 Year UST Spread

Sources: Federal Reserve, Maximus Advisors

Apartment Segment

Residential Demand Dynamics in Flux

16

Homeownership Showing Signs of Stabilizing; Household Formation Rate Still Weak

Sources: Census, Maximus Advisors

Homeownership Gliding Toward Stabilization… …But Reported Household Formation Rate Has

Fallen to Unbelievable Recession Levels

Generation Y Numbers Some 80 Million and Represents Huge Untapped Reservoir of Apartment Demand

17

But This Cohort Faces Significant Headwinds

Sources: Census, Maximus Advisors

…And Nearly One-Third of 18-34 Year Olds Are Living With Their Parents

Young Adult Jobless Rate Has Made Significant Headway Despite Recent Choppiness, but

Remains High …

»  “Generation Y” will have a massive impact on the residential market, numbering about as large as the baby boom.

»  High student debt load remains a key uncertainty in young adult household formations and single-family demand.

»  Urban focus may change ownership/rental and suburban/urban housing demand mix.

1-Family Affordability Good but Rising Rates and Prices Caused Some Erosion

18

Rent vs. Buy Seesawing

Several factors still inhibiting single-family demand: »  Lack of mortgage credit »  Damaged credit scores »  Home viewed as risky investment »  Owning limits liquidity and mobility.

Rising Rates and Prices Diminishing Affordability … … Shifting Home Price-to-Rent Ratio Near Balance, Slightly Favoring Renting

Sources: Census, MBA, NAR, Maximus Advisors

Apartment Fundamentals Very Healthy

19

Vacancies Have Fallen to Very Low Level, Generating Solid Rent Growth

Sources: Reis, Maximus Advisors

Vacancies Sitting Around 4% Apartment Effective Rent Growth Strong

New Development Cycle Underway but Oversupply Is Not an Issue at this Time

20

Multifamily Starts Up from Modern Record Low but Not at Overbuilding Level

Sources: Reis, Maximus Advisors Forecasts

Multifamily Starts Up, Portending Future Supply

Multifamily Starts Likely to Continue to Increase in Near Term Amid Low Vacancies and High and Rising

Rents

Apartment Vacancies Low but Approaching Stabilization as Supply Picks Up

21

Apartment Segment Is a Standout

Sources: Reis, Maximus Advisors Forecasts

Apartment Vacancies Will Trough at Very Low Level in 2016

US Apartment Rents Will Continue to Rise Despite An Uptick In Vacancies In Later Years

Apartment Markets Look Strong Over Next Few Years

22

Pink Markets Reflect Development Further Along

Source: Maximus Advisors

•  Economy ratings range from 1 (very strong) to 6 (very weak) based on our analysis of current and near-term economic momentum.

•  Individual box size is based on market apartment inventory.

Office Segment

Office Recovery Pace Will Mirror Strength of Economy; Shadow Inventory Erased

24

Office Job Growth Back on Track; With Shadow Space Erased, Absorption Should Strengthen

Sources: Reis, Maximus Advisors Forecasts

Office Jobs Growing Strongly Again Office Job Growth Over Past 4 Years Has Worked Off Shadow Space

Office Recovery Has Been Tepid

25

Vacancies Slightly Off Peak; Rents Just Above Floor

Sources: Reis, Maximus Advisors

…Constraining Rent Growth To Minimal Gains Office Vacancies Just 80 bps Off Their Peak….

Office Recovery Will Pick Up Steam with the Economy

26

Vacancies Have Peaked and Rents Have Troughed; Stage Set for Stronger Recovery

Sources: Reis, Maximus Advisors forecasts

Office Recovery Should Start to Accelerate Office Rents Will Grow Slowly Until Demand Picks

Up and Brings Vacancies Down More Rapidly

Regional Clusters of Strong Office Markets

27 Sources: Maximus Advisors

•  Our forward view of segment fundamentals on scale of 1/dark green (very strong) to 6/dark red (very weak).

•  Individual box size based on market office inventory.

Retail Segment

Retail Segment Is Drifting

29

No Signs of Momentum

Sources: Reis, Maximus Advisors

Retail Effective Rents Soft Retail Vacancies Remain Elevated

Retail Recovery Also Awaits Stronger Macro Growth but Will Continue to Have Headwinds

30

Vacancies Will Decline Swiftly Once Demand Accelerates but Remain Above Previous Cycle Level

Sources: Reis, Maximus Advisors forecasts

Absence of Development Will Assist the Retail Recovery but Economy Must Cooperate Rents Will Be Slow to Recover Amid High Availability

»  Brick & mortar retail remains under intense pressure from e-retail. »  Impact comes in form of store closings and changed footprint of stores.

Many Retail Markets Drifting; Demographics Are Destiny

31 Sources: Maximus Advisors

•  Our forward view of segment fundamentals on scale of 1/dark green (very strong) to 6/dark red (very weak).

•  Individual box size based on market retail inventory.

Strong Pockets in Texas and Coasts

Industrial Segment

Industrial Drivers Healthy

33

Underlying Industrial Demand Drivers Bounced Back, Appear Primed for Continued Strength

Sources: Census, Federal Reserve, Maximus Advisors

»  Industrial sector benefitting immensely from shift to e-retail.

»  Expansion of Panama Canal will benefit US East Coast ports.

Capacity Utilization Nearing Normal, Healthy Level

New Capital Goods Orders Strong

Industrial Production Has Surpassed Prior Peak

Another Hiccup for Trade

34

Improvement in Europe and China Economies Would Help Propel Further Gains

Sources: Census, Maximus Advisors

If Demand Holds Up, Industrial Vacancies Will Drop Rapidly

35

Strong Absorption May Simmer Down but Vacancies Look to Decline; Development Likely to Pick Up

Sources: Reis, Maximus Advisors forecasts

Industrial Vacancies Will Continue to Improve Amid Solid Demand and Limited Supply Industrial Rents Will Accelerate as Vacancies Fall

Industrial Markets Improving but Starting to See Supply Pick Up

36 Sources: Maximus Advisors

•  Our forward view of segment fundamentals on scale of 1/dark green (very strong) to 6/dark red (very weak).

•  Individual box size based on market industrial inventory.

Larger Industrial Markets Among Healthiest

Hospitality Segment

Key Drivers of Hospitality Demand Growing

38

Drivers of Hospitality Demand Look Good

Sources: BEA, GBTA, Maximus Advisors

Consumer Spending on Hotels & Motels Has Been Strong

Business Travel Trips Edged Down in 2013 but Spending Was Up; Both Trips and

Spending Look to Grow in 2014

Key Drivers of Hospitality Demand Growing

39

Hiccup in Foreign Travel Spending Mirrors Exports Slowdown

Sources: ITA, Maximus Advisors

Hospitality Healthy

40

Room Demand Remains Strong, Up a Healthy 3.7% from a Year Ago; Supply Continues to Increase Modestly

Sources: STR, Maximus Advisors

Occupancies Stand at Healthy Level, Enabling Hotel Operators to Raise Rates

41

Occupancies Have Resumed Upward Momentum; ADRs & RevPAR Growing

Sources: STR, Maximus Advisors

Occupancies Healthy Room Rate and RevPAR Maintain Healthy Growth

Outlook for Operating Conditions

42

Expansion Should Stay on Track but Slow as It Matures

Sources: STR, Maximus Advisors forecasts

Occupancies Will Continue Their Upward Trajectory

Room Rate and RevPAR Growth Will Cool to Still-Healthy Pace in Coming Years

Most Hospitality Markets Have Strong Prospects

43 Sources: Maximus Advisors

•  Our forward view of segment fundamentals on scale of 1/dark green (very strong) to 6/dark red (very weak).

•  Individual box size based on market hotel inventory.

Peter  Muoio,  Ph.D.  646-­‐352-­‐9510  pmuoio@auc<on.com    

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