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

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The US Commercial Real Estate Market Forecast: Summer Update July 2014 Auction.com Research

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Slides from the U.S. Commercial Real Estate Market Forecast Summer Update webinar by Peter Muoio, Head of Auction.com Research.

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Page 1: U.S. Commercial Real Estate Market Forecast - Summer Update

The US Commercial Real Estate Market Forecast: Summer Update

July 2014

Auction.com Research

Page 2: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 3: U.S. Commercial Real Estate Market Forecast - Summer Update

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?

Page 4: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 5: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 6: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 7: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 8: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 9: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 10: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 11: U.S. Commercial Real Estate Market Forecast - Summer Update

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.

Page 12: U.S. Commercial Real Estate Market Forecast - Summer Update

Real Estate Capital Markets

Page 13: U.S. Commercial Real Estate Market Forecast - Summer Update

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

$0

$20

$40

$60

$80

$100

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$140

$160

$18001

Q1

01Q3

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14Q1

Deal  Volum

e,  $  Billions

Page 14: U.S. Commercial Real Estate Market Forecast - Summer Update

Cap Rates Resisted Upward Interest Rates

14

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

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500

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0%

1%

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Cap Rates 10 Year UST Spread

Sources: Federal Reserve, Maximus Advisors

Page 15: U.S. Commercial Real Estate Market Forecast - Summer Update

Apartment Segment

Page 16: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 17: U.S. Commercial Real Estate Market Forecast - Summer Update

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.

Page 18: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 19: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 20: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 21: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 22: U.S. Commercial Real Estate Market Forecast - Summer Update

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.

Page 23: U.S. Commercial Real Estate Market Forecast - Summer Update

Office Segment

Page 24: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 25: U.S. Commercial Real Estate Market Forecast - Summer Update

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….

Page 26: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 27: U.S. Commercial Real Estate Market Forecast - Summer Update

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.

Page 28: U.S. Commercial Real Estate Market Forecast - Summer Update

Retail Segment

Page 29: U.S. Commercial Real Estate Market Forecast - Summer Update

Retail Segment Is Drifting

29

No Signs of Momentum

Sources: Reis, Maximus Advisors

Retail Effective Rents Soft Retail Vacancies Remain Elevated

Page 30: U.S. Commercial Real Estate Market Forecast - Summer Update

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.

Page 31: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 32: U.S. Commercial Real Estate Market Forecast - Summer Update

Industrial Segment

Page 33: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 34: U.S. Commercial Real Estate Market Forecast - Summer Update

Another Hiccup for Trade

34

Improvement in Europe and China Economies Would Help Propel Further Gains

Sources: Census, Maximus Advisors

Page 35: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 36: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 37: U.S. Commercial Real Estate Market Forecast - Summer Update

Hospitality Segment

Page 38: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 39: U.S. Commercial Real Estate Market Forecast - Summer Update

Key Drivers of Hospitality Demand Growing

39

Hiccup in Foreign Travel Spending Mirrors Exports Slowdown

Sources: ITA, Maximus Advisors

Page 40: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 41: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 42: U.S. Commercial Real Estate Market Forecast - Summer Update

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

Page 43: U.S. Commercial Real Estate Market Forecast - Summer Update

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.

Page 44: U.S. Commercial Real Estate Market Forecast - Summer Update

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

For  our  latest  insights  follow  us  at:  www.auc4on.com/blog  Twi9er:  @MaxRockResearch  Facebook:    MaxRockResearch  Linkedin:  Maximus  Advisors    www.auc4on.com