commercial real estate: 2015 investment outlook lawrence yun, phd chief economist, sr. vp national...

COMMERCIAL REAL ESTATE: 2015 INVESTMENT OUTLOOKCOMMERCIAL REAL ESTATE: 2015 INVESTMENT OUTLOOK

LAWRENCE YUN, PhDLAWRENCE YUN, PhD

Chief Economist, Sr. VP

National Association of REALTORS®

DONALD E. HUFFNERDONALD E. HUFFNER

Managing Director, Head of Americas

AIG Global Real Estate

RICHARD M. GATTORICHARD M. GATTO

Executive Vice President

The Alter Group

ANDREW H. TROTTER, IIIANDREW H. TROTTER, III

Chief Investment Officer

Centennial Holding Company

COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM

Commercial Real Estate Trends and Outlook

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at:NAR Annual Commercial Real Estate Forum

New Orleans, LA

November 7, 2014

Commercial Investment Sales of Large Properties

(Properties valued at $2.5 million and over)

Federal Reserve Commercial Property Price Index

GDP Reboundin 2014 Q2 and Q3

GDP Still not Robust … Below 3% for 9 straight years

Household Net Worth at All-Time High

Monetary Policy by Federal Reserve (zero rate policy for 6 years!)

%

Federal Reserve Balance Sheet from Quantitative Easing

$ million

10-year Treasury Yield

Non-worrisome CPI Inflation – YetCOLA of 1.7% in 2015

Rising Renters’ and Homeowners’ Rent Growth

(Above 3%)

Oil Price

REALTOR® Rent Survey – Shows Rent Pressure

U.S. Dollar Strength vs Euro

U.S. Dollar Weakness vs Chinese Yuan

Monetary Policy

• Quantitative Easing … Finished

• Fed Funds Rate … hike in 2015 Q1/Q2

• Earlier Move to Tighten because of Inflation Pressure

• Long-term Steady State Rate (2016 onwards) .. 10 year Treasury at 5.0%

• Mortgage Rates reaching 6% by 2016

Jobs(8 million lost … 10 million gained)In thousands

Weekly New Unemployment Insurance Claims

In thousands

Job Market Comparisons by StateFast Growing States

1-year Growth Rate

North Dakota 4.5

Nevada 3.7

Texas 3.4

Florida 2.9

Utah 2.9

Colorado 2.8

Oregon 2.7

Delaware 2.6

West Virginia 2.5

California 2.2

Slow Moving States

1-year Growth Rate

Michigan 0.7

Alabama 0.6

Wyoming 0.6

South Dakota 0.3

Virginia 0.3

New Jersey 0.1

Illinois 0.0

Alaska 0.0

New Mexico -0.1

Vermont -0.2

REALTOR® Markets & Deal Size(Not $2.5 million Properties)

Small Banks Important to REALTORS®

NAR Member Commercial Activity Survey2nd Quarter, 2014

• Sales volume rose 7% YoY

• Sales prices increased 3% YoY

• Cap rates averaged 8.3%

Main market challenges:• Inventory shortage • Pricing gap between buyers and sellers• Local economies

REALTORS® Help Small Businesses

Credit Difficulty

A Typical Commercial REALTOR®

BUSINESS REVENUE AND FIRM AFFILIATION

•The median gross annual income of commercial members was $96,200 in 2013, an increase from $90,200 in 2012. The median gross annual income of commercial members has increased for the past four years.

•Eighty percent of commercial members work at least 40 hours a week.

•Sixty-two percent of commercial members of NAR derived 50 percent or more of their income from all commercial real estate in 2013.

•Fifty-seven percent of members work for a local commercial real estate firm.

BUSINESS ACTIVITIES OF NAR COMMERCIAL MEMBERS

•Commercial members completed a median of eight transactions in 2013.

•The median sales transaction volume in 2013 for members who had a transaction was $2,554,700 – an increase from $2,507,700 in 2012.

•The median gross leasing volume was $431,600 in 2013– a decrease from the $476,400 in 2012.

CCIM Member Survey on Cap Rates

SIOR Member Survey on Activity

Economic Forecast

2013 2014Likely

2015Forecast

2016 Forecast

GDP Growth 2.2% 2.2% 2.7% 2.9%

Job Growth +2.3 million +2.5 million +2.5 million +2.6 million

CPI Inflation 1.5% 1.6% 2.7% 3.3%

Consumer Confidence

73 87 95 98

10-year Treasury

2.5% 2.6% 3.2% 4.3%

OFFICE 2014 2015 2016Vacancy Rate 16.2% 15.8% 15.6%Net Absorption ('000 sq. ft.) 36,192 50,678 57,782Completions ('000 sq. ft.) 26,450 41,799 44,862Rent Growth 2.6% 3.2% 3.6%

 INDUSTRIAL 2014 2015 2016Vacancy Rate 8.9% 8.5% 8.1%Net Absorption ('000 sq. ft.) 107,580 104,948 105,044Completions ('000 sq. ft.) 83,424 68,755 61,720Inventory ('000,000 sq. ft.) 8,468 8,537 8,598Rent Growth 2.4% 2.8% 2.9%

 RETAIL 2014 2015 2016Vacancy Rate 9.8% 9.7% 9.4%Net Absorption ('000 sq. ft.) 11,214 19,314 24,313Completions ('000 sq. ft.) 7,275 12,196 16,342Rent Growth 2.0% 2.4% 3.0%

 MULTI-FAMILY 2014 2015 2016Vacancy Rate 4.0% 4.0% 4.2%Net Absorption (Units) 223,421 170,065 140,128Completions (Units) 191,481 146,461 122,381Rent Growth 4.0% 3.9% 3.5%

Sources: National Association of REALTORS® / Reis, Inc.

Commercial Real Estate Forecast

Washington Policy Watch onCommercial Real Estate

• Facilitate Covered Bonds to help credit flow

• Raise cap on holding of commercial RE loans by credit unions

• Preserve Like-Kind Exchanges

• Preserve Terrorism Insurance

• Preserve capital gains status on carried interest

• Depreciation Rules should match economic life

• Oppose lease-accounting changes

Richard M. GattoExecutive Vice President

The Alter Group

Donald E. HuffnerManaging Director, Head of

the AmericasAIG Global Real Estate

Andrew H. Trotter, IIIChief Investment Officer

Centennial Holding Company

COMMERCIAL REAL ESTATE: 2015 INVESTMENT OUTLOOKCOMMERCIAL REAL ESTATE: 2015 INVESTMENT OUTLOOK

LAWRENCE YUN, PhDLAWRENCE YUN, PhD

Chief Economist, Sr. VP

National Association of REALTORS®

DONALD E. HUFFNERDONALD E. HUFFNER

Managing Director, Head of Americas

AIG Global Real Estate

RICHARD M. GATTORICHARD M. GATTO

Executive Vice President

The Alter Group

ANDREW H. TROTTER, IIIANDREW H. TROTTER, III

Chief Investment Officer

Centennial Holding Company

COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM