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2015 REAL ESTATE ECONOMIC FORECAST
February 5, 2015
Jeanette I. Rice
The National Economy and What It Means For Real Estate
Kentucky
Chapter
National economy in great shape for 2015
• Creating excellent demand for all property markets
• Attracting lots of debt and equity capital for
commercial real estate
3
U.S. ECONOMY
4
U.S. ECONOMY - EMPLOYMENT
125
130
135
140
145
Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
Mill
ions
Total Historical Employment
Source: U.S. Bureau of Labor Statistics,
seasonally adjusted data through Dec 2014
-6
-4
-2
0
2
4
Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
Historical Employment – % Change Y-o-Y
US economy - four years of economic recovery/expansion.
Last May, US regained all jobs lost (numerically) during recession.
Currently +2.1% yoy (3.0 million jobs).
Dec = +252,000 jobs 2014 average = +246,000
5
U.S. ECONOMY – EMPLOYMENT GROWTH UNEVEN
Sources: CBRE Research, U.S. Bureau of Labor Analytics (data through
Dec 2014); CBRE Econometric Advisors forecasts as of Q3 2014.
1.5
1.7
2.2
2.2
2.2
2.2
2.2
2.2
2.3
2.3
2.4
2.5
2.7
2.8
2.8
2.9
3.0
3.4
3.6
3.8
Louisville
US
Denver
Atlanta
Charlotte
Indianapolis
Miami
Riverside
Phoenix
Dallas
Raleigh
Greenville
Orlando
Salt Lake City
San Antonio
Fort Worth
Fort Lauderdale
West Palm Beach
Austin
Nashville
Top Metros for Projected Annual Pct Employment Growth Over Next Two Years
-9
-6
-3
0
3
6
Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
Historical Employment – % Change Y-o-Y
U.S. Detroit Austin Louisville
6
U.S. ECONOMY – 10-YEAR TREASURIES
Source: Federal Reserve Bank, data through 02.02.15.
0
2
4
6
Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
02.02.15 = 1.68%
7
U.S. ECONOMY – SECTORS TO WATCH
Source: U.S. Bureau of Census (starts data).
Housing -
Manufacturing -
Consumer Spending -
Global Economies -
Strong U.S. Dollar - -
Energy -
High Tech -
Interest Rates -
1.2 1.3 1.4
1.5 1.6
1.7
1.5
1.0
0.6
0.4 0.5 0.4 0.5
0.6 0.6
0.0
0.5
1.0
1.5
2.0
00 02 04 06 08 10 12 14
Millions
Total Single-Family Starts
Still way below
2000s peak, but
rising.
In 2014, starts rose
5% over 2013 to
an annual rate of
648,000 units.
8
U.S. ECONOMY – OUTLOOK
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
03 07 11 15
Employment Forecasts - Change Y-o-Y
2014 = 1.8%
2015 = 2.1%
About 245,000 jobs/month
GDP Outlook
2014 = 2.4%
2015 = 3.3%
2016 = 2.9%
2017 = 2.7%
2018 = 2.7%
Sources: CBRE Research (employment forecasts);
Oxford Economics (GDP forecasts as of 01.13.15).
Increased Global Capital Flows, Favorable Returns
Disciplined Debt
Capital Markets
2015 REAL ESTATE ECONOMIC FORECAST The National Economy and What It Means For Real Estate
10
CAPITAL MARKETS - IMPRESSIVE INVESTMENT GAINS
-
100
200
300
400
500
600
01 02 03 04 05 06 07 08 09 10 11 12 13 14
$ Billions
Total Direct Investment in U.S. Commercial Real Estate
Individual Portfolio Entity
Sources: Real Capital Analytics and CBRE Research..
Total 2014 direct
investment = $424
billion.
17% rise over
2013.
2014 still 26%
below prior peak
(but only 5% below
when entity sales
removed).
CBRE Research
projects a gain of
10-15% in 2015.
11
U.S. INVESTMENT VOLUMES – BY GLOBAL REGION ORIGIN
2014 Global Total = $41 Billion
Sources: Real Capital Analytics and CBRE Research. Totals
excluding transactions under contract.
Canada 25%
Norway 11%
Japan 10%
China 8% Germany
6%
Hong Kong 5%
Switzerland 5%
Singapore 4%
Australia 3%
Other 23%
12
THE SCARCITY OF CORE
13
U.S. COMMERCIAL MORTGAGE MARKET
1. Nearly all capital sources firing on
all cylinders and expected to
increase lending in 2015
2. Delinquency rates at decade low
and expected to remain there
through 2015
3. CMBS 2005-06-07 vintages coming
due, but not likely to create much
distress this year
4. Mortgage interest rates to remain
very low with favorable outlook for
2015
5. Underwriting loosening, but not
dangerously
Recovery Maturing, Continued Gains in Market Performance
Property Markets
2015 REAL ESTATE ECONOMIC FORECAST The National Economy and What It Means For Real Estate
OFFICE Changing Patterns of Demand, Continued Recovery
16
OFFICE DEMAND
-50
-25
0
25
50
75
100
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Absorption (millions of sq. ft.)
Forecast
Source: CBRE Econometric Advisors,
4Q 2014. Forecasts as of 3Q 2014.
17
OFFICE SUPPLY, DEMAND, VACANCY OUTLOOK
0
3
6
9
12
15
18
-50
-25
0
25
50
75
100
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Completions Net Absorption Vacancy (4Q)
Completions and Absorption (millions of sq. ft.)
Vacancy
Forecast
Source: CBRE Econometric Advisors,
4Q 2014. Forecasts as of 3Q 2014.
Net absorption far
outpacing new supply.
In 2014, demand rose
46% reaching 53
million sq. ft. This was
the highest level since
2007.
New supply also rising
(+22% in 2014), but far
below demand at 22
million sq. ft.
2014 construction was
concentrated in a few
metros: Houston, NYC,
Washington, Dallas,
San Fran, San Diego,
and Pittsburgh.
Together, they
accounted for 72% of
the U.S. total..
18
MARKET FUNDAMENTALS – RENT GROWTH
Source: CBRE Econometric Advisors, Q3
2014. Historical average = 1.0%
3.3 3.3 3.4 4.5
-16
-12
-8
-4
0
4
8
12
00 02 04 06 08 10 12 14 16 18
Annual Rent Change
19
SQUARE FOOTAGE REDUCTION, CHANGING STYLE
20
OFFICE TRANSACTIONS – PRICING METRICS
Sources: Real Capital Analytics and CBRE Research. For all office
transactions > $2.5 million and all classes of space. Through Q4 2014.
6%
7%
8%
9%
04Q1 06Q1 08Q1 10Q1 12Q1 14Q1
Average Cap Rates
$100
$150
$200
$250
$300
04Q1 06Q1 08Q1 10Q1 12Q1 14Q1
Average Price PSF
INDUSTRIAL Shift to Light Industrial?
22
INDUSTRIAL DEMAND
-300
-200
-100
0
100
200
300
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Absorption (millions of sq. ft.)
Forecast
Source: CBRE Econometric Advisors, 4Q 2014.
23
INDUSTRIAL SUPPLY, DEMAND, VACANCY OUTLOOK
-3
0
3
6
9
12
15
-300
-200
-100
0
100
200
300
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Completions Net Absorption Vacancy (4Q)
Completions and Absorption (millions of sq. ft.)
Vacancy
Forecast
Source: CBRE Econometric Advisors, 4Q 2014.
Completions – 117
million sq. ft. in 2014
Net Absorption –
226 million sq. ft.
Availability – 10%,
favorable 1 point
drop in 2014
24
MARKET FUNDAMENTALS – RENT GROWTH
Source: CBRE Econometric Advisors, Q3
2014. Historical rent change = 0.3%
4.7 5.1 4.9
-12
-8
-4
0
4
8
00 02 04 06 08 10 12 14 16 18
Annual Rent Change
25
E-commerce sales have risen by
16.2% in year ending Q3 2014,
compared to all retail which is up 4.2%.
E-COMMERCE
-15%
0%
15%
30%
45%
02 04 06 08 10 12 14
E-Commerce Retail Sales - YOY Change
All Retail
E-Commerce
Source: U.S. Census Bureau, data through Q3
2014. Data are seasonally adjusted.
6.6%
0%
2%
4%
6%
8%
02 04 06 08 10 12 14
E-commerce as % of All Retail Sales
26
LARGEST U.S. CONTAINER PORTS
Sources: CBRE Research, American Association of Port
Authorities; market share based on total 2013 TEUs
Los Angeles
18%
Long Beach 15%
NY/NJ 12%
Savannah 7% Oakland
5%
Norfolk 5%
Houston 4%
Tacoma 4%
Charleston 4%
Seattle 4%
All Others 22%
Los Angeles and Long Beach combined =
33% of all US container traffic.
The top 10 ports account for nearly 80%.
East Coast ports container volume
+5.9% ytd through November
vs. West Coast at +3.7%
27
INDUSTRIAL TRANSACTIONS – PRICING METRICS
Sources: Real Capital Analytics and CBRE Research. For all industrial
transactions > $2.5 million and all classes of space. Through Q4 2014.
6%
7%
8%
9%
04Q1 06Q1 08Q1 10Q1 12Q1 14Q1
Average Cap Rates
$40
$50
$60
$70
$80
04Q1 06Q1 08Q1 10Q1 12Q1 14Q1
Average Price PSF
Investment volume –
9% increase, 2014
CBRE Research
forecasts industrial
investment volumes
to rise 10-15% in
2015.
In 2015, there will be
greater % of “light
industrial”
acquisitions.
RETAIL Are Rumors of Brick-and-Mortar’s Demise Greatly Exaggerated?
29
RETAIL SALES – YEAR-OVER-YEAR CHANGE
4.2%
-12%
-8%
-4%
0%
4%
8%
02 04 06 08 10 12 14
Source: U.S. Census Bureau, data through Q3
2014. Data are seasonally adjusted.
Yes, 93% of retail
sales still occur out of
brick and mortar
space.
Retail sales +4.2%
year-over-year as of
Q3 2014.
December + 3.2% over
prior year.
30
RETAIL DEMAND
-40
-20
0
20
40
60
80
100
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Absorption (millions of sq. ft.)
Forecast
Source: CBRE Econometric
Advisors, as of 3Q 2014.
31
RETAIL SUPPLY, DEMAND, VACANCY OUTLOOK
0
2
4
6
8
10
12
14
-40
-20
0
20
40
60
80
100
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Completions Net Absorption Vacancy (4Q)
Completions and Absorption (millions of sq. ft.)
Vacancy
Forecast
Source: CBRE Econometric
Advisors, as of 3Q 2014.
Net absorption far
outpacing new supply.
Practically no retail
space built for several
years or in the
pipeline. Only about 13
msf in 2014.
Net absorption - 29
msf, highest since ’07
Availability rate
dropping steadily.
Q4 2014 = 11%, down
0.6 point in 2014.
32
MARKET FUNDAMENTALS – RENT GROWTH
Source: CBRE Econometric Advisors, Q3 2014.
1.3
3.8
4.9 5.7
-6
-4
-2
0
2
4
6
8
00 02 04 06 08 10 12 14 16 18
Annual Rent Change for Neighborhood & Community Centers
33
THE GREAT AND THE NOT-SO-GREAT
Some keys to
success today are
centers which offer
some combination
of:
luxury goods
service
entertainment
an experience.
34
RETAIL TRANSACTIONS – PRICING METRICS
Sources: Real Capital Analytics and CBRE Research. For all retail
transactions > $2.5 million. Through Q4 2014.
6%
7%
8%
9%
04Q1 06Q1 08Q1 10Q1 12Q1 14Q1
Average Cap Rates
All Retail
Malls
Non Mall Centers
$50
$100
$150
$200
$250
04Q1 06Q1 08Q1 10Q1 12Q1 14Q1
Average Price PSF
Investment volume
rose 33% in 2014.
Has the Multifamily Sector Peaked?
MULTIFAMILY
36
MULTIFAMILY DEMAND
-200
-100
0
100
200
300
400
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Absorption (units)
Forecast
Source: CBRE Econometric
Advisors, as of 3Q 2014.
37
MULTIFAMILY SUPPLY, DEMAND, VACANCY OUTLOOK
-4
-2
0
2
4
6
8
-200
-100
0
100
200
300
400
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Completions Net Absorption Vacancy (4Q)
Completions and Absorption (units)
Vacancy
Forecast
Source: CBRE Econometric
Advisors, as of 3Q 2014.
Completions reached
about 276,000 in 2014,
highest in over a
decade.
Net absorption totaled
about 235,000, slightly
under new supply.
Vacancy – 4.4% as of
4Q, down 0.5 point in
2014.
Vacancy almost down
to the prior low of 4.3%
in 2006.
38
MARKET FUNDAMENTALS – RENT GROWTH
Source: CBRE Econometric Advisors, Q3 2014.
3.0 2.5 2.5
-6
-3
0
3
6
9
00 02 04 06 08 10 12 14 16 18
Annual Rent Change
39
Forecast
NO SIGNIFICANT MOVE TO HOMEBUYING YET
Tenure shift and demographics continue to support fundamentals
Sources: CBRE Research, U.S. Census Bureau. Data through Q4 2014.
30.8
36.0
30
32
34
36
38
Q1 1965 Q1 1975 Q1-1985 Q1 1995 Q1 2005 Q1 2015
Rental Tenure - % of Renter Households to Total
1965-2014
Average = 34.6%
Q4 85 – Q2 94
Average = 36.0%
40
MULTIFAMILY TRANSACTIONS – PRICING METRICS
Sources: Real Capital Analytics and CBRE Research. For all multifamily
transactions > $2.5 million and all classes of space. Through Q4 2014.
5.8%
5%
6%
7%
8%
04Q1 06Q1 08Q1 10Q1 12Q1 14Q1
Average Cap Rates
$126,680
$70,000
$90,000
$110,000
$130,000
04Q1 06Q1 08Q1 10Q1 12Q1 14Q1
Average Price Per Unit
In short….
An excellent 2015
Jeanette I. Rice CRE®
Americas Head of Investment Research
CBRE | CBRE Research
2100 McKinney Avenue, Suite 700 | Dallas, TX 75201
T 214 979 6169 | C 817 412 0709
jeanette.rice@cbre.com | www.cbre.com
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