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.

TRANSCRIPT

  • 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 $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 01Q1 01Q3 02Q1 02Q3 03Q1 03Q3 04Q1 04Q3 05Q1 05Q3 06Q1 06Q3 07Q1 07Q3 08Q1 08Q3 09Q1 09Q3 10Q1 10Q3 11Q1 11Q3 12Q1 12Q3 13Q1 13Q3 14Q1 Deal Volume, $ Billions
  • Cap Rates Resisted Upward Interest Rates 14 Interest Rates Started to Climb in 2013 but Cap Rates Were Range-Bound to Lower 0 500 1000 1500 2000 2500 3000 3500 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 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 GainsOffice 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 27Sources: 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 ofce inventory.
  • Retail Segment
  • Retail Segment Is Drifting 29 No Signs of Momentum Sources: Reis, Maximus Advisors Retail Effective Rents SoftRetail 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 31Sources: 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 36Sources: 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 43Sources: 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 [email protected]