Commercial Real Estate Market Outlook

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at NAR Midyear Legislative MeetingsWashington, D.C.

May 12, 2011

Moderate GDP Growth

Total Job Gains(in millions from 12 month ago)

Jobs: Private vs. Public(index = 1 in 1990)

1990s Federal Government Job Cuts

Federal Budget Surplus/Deficit

Federal Government Spending/Revenue

Private Sector Construction (Minimal new inventory addition helps vacancy rate to fall)

Value Put-in-Place in $ million

U-Turn in Commercial Sales(for properties valued at $2.5 million or higher)

RESEARCH

$0

$20,000,000,000

$40,000,000,000

$60,000,000,000

$80,000,000,000

$100,000,000,000

$120,000,000,000

$140,000,000,000

$160,000,000,000

U.S. Sales Volume

Apartment Hotel Industrial Office Retail

Source: Real Capital Analytics

REALTORS® Commercial Market Survey

RESEARCH

60%

40%

Completed sales transaction?

YesNo

Source: NAROver $10 M

Between $5 M and $10 M

$2 M and $5 M

Between $1 M and $2 M

Between $500K and $1 M

Between $250K and $500K

Under $250K

2%

2%

8%

12%

20%

25%

31%

Dollar amount of last transaction

REALTORS® Commercial Sales Trend

RESEARCH

2008.Q4 2009.Q1 2009.Q2 2009.Q3 2009.Q4 2010.Q1 2010.Q2 2010.Q3 2010.Q4 2011.Q1

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Source: NAR

Modestly Getting Better

Commercial Debt CMBS Markets

RESEARCH

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Monthly CMBS Issuance ($ Mil)

Source: Commercial Mortgage Alert

Commercial Lending

RESEARCH

2002.Q1

2002.Q2

2002.Q3

2002.Q4

2003.Q1

2003.Q2

2003.Q3

2003.Q4

2004.Q1

2004.Q2

2004.Q3

2004.Q4

2005.Q1

2005.Q2

2005.Q3

2005.Q4

2006.Q1

2006.Q2

2006.Q3

2006.Q4

2007.Q1

2007.Q2

2007.Q3

2007.Q4

2008.Q1

2008.Q2

2008.Q3

2008.Q4

2009.Q1

2009.Q2

2009.Q3

2009.Q4

2010.Q1

2010.Q2

2010.Q3

2010.Q4

0

50

100

150

200

250

300

350

400Origination Volume Index (2001 Qtr Avg=100)

Source: Mortgage Bankers Association

REALTORS® Commercial Lending Survey

RESEARCH

59%

33%

8%

Failed to complete transaction due to financing in 2011?

Yes

No

N/A

Tightened Signif-icantly

Tightened Somewhat

Not Changed

Eased Somewhat

Eased Significantly

N/A

47%

18%

19%

15%

0%

1%

Changes in lending conditions over past year

Source: NAR

REALTORS® Commercial Lending Survey

RESEARCH

National Banks

Regional Banks

Credit Unions

Life Insurance Cos.

REITs

Private Investors

Public Cos.

Other

0 50 100 150 200 250 300 350

Sources of Financing

Fannie/Freddie

HUD

SBA

Community/Local Banks

Owner Financing

Crossborder Investors

Mortgage Brokers/Cos.

Don't know/None

Misc.

0 5 10 15 20 25 30

Providers of commercial financing: Other

Commercial Equity Markets

RESEARCH

J 06 M M J S N

J 07 M M J S N

J 08 M M J S N

J 09 M M J S N

J 10 M M J S N

J 11

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Public Equity

Monthly US REIT Equity Issuance ($ Mil)

Source: NAREIT

Commercial Price Index

RESEARCH

20 5 9 20 5 9 20 5 9 20 5 9 20 5 9 20 5 9 20 5 9 20 5 9 20 5 9 20 5 9 20

0.9

1.1

1.3

1.5

1.7

1.9

2.1 MIT CPPI

Source: Real Capital Analytics, MIT

Commercial Distress

RESEARCH

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M2008 2009 2010 2011

$-

$50,000,000,000

$100,000,000,000

$150,000,000,000

$200,000,000,000

$250,000,000,000

$300,000,000,000

$350,000,000,000 Cummulative Distress

Troubled REO Restructured Resolved

Source: Real Capital Analytics

REALTOR® Commercial Market Survey on Price

RESEARCH

2008.Q4 2009.Q1 2009.Q2 2009.Q3 2009.Q4 2010.Q1 2010.Q2 2010.Q3 2010.Q4 2011.Q1

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

Source: NAR

Cap Rates(Steady Apartment and Swinging Office)

RESEARCH

05Q105Q2

05Q305Q4

06Q106Q2

06Q306Q4

07Q107Q2

07Q307Q4

08Q108Q2

08Q308Q4

09Q109Q2

09Q309Q4

10Q110Q2

10Q310Q4

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%Apartment Industrial Office Retail

Source: Real Capital Analytics

U.S. Treasury Yields(1% point rise in blended interest rate will mean $2 trillion in

extra government outlay over the next 10 years)

Office Fundamentals

2010.2 2010.3 2010.4 2011.1 2011.2 2011.3 2011.40

2000

4000

6000

8000

10000

12000

15.0%

15.2%

15.4%

15.6%

15.8%

16.0%

16.2%

16.4%

16.6%

16.8%

Completions Absorption Vacancy

Squa

re F

eet (

'000

s)

Perc

ent (

%)

Source: NAR/CBRE-EA

RESEARCH

Office Rents

2004 2005 2006 2007 2008 2009 2010 2011 2012

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

National Rent Growth

Source: NAR/CBRE-EA

RESEARCH

Financial Activity and Professional Business Service Job Gains

(in thousands from 12 month ago)

Office Vacancies

RESEARCH

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

8.3%

16.5%

25.8%

Selected Markets - 2011.Q1

Source: NAR/CBRE-EA

Industrial Fundamentals

RESEARCH

2010.2 2010.3 2010.4 2011.1 2011.2 2011.3 2011.4

-10000

0

10000

20000

30000

40000

50000

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

Completions Absorption Vacancy

Squa

re F

eet (

'000

s)

Perc

enta

ge (%

)

Source: NAR/CBRE-EA

Industrial Rents

RESEARCH

2004 2005 2006 2007 2008 2009 2010 2011 2012

-12.00%

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

National Rent Growth

Source: NAR/CBRE-EA

Wholesale Inventory Bouncing Back (Value in $ million)

Industrial Vacancies

RESEARCH

Los Angeles

Salt Lake City

Orange CountyHouston

Kansas CityNATION

PhoenixBoston

StamfordDetroit

Trenton0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

7.5%

14.2%

23.3%

Selected Markets - 2011.Q1

Source: NAR/CBRE-EA

Retail Fundamentals

RESEARCH

2010.2 2010.3 2010.4 2011.1 2011.2 2011.3 2011.4

-1000

-500

0

500

1000

1500

2000

2500

12.6%

12.7%

12.8%

12.9%

13.0%

13.1%

13.2%

Completions Absorption Vacancy

Squa

re F

eet (

000'

s)

Perc

enta

ge (%

)

Source: NAR/CBRE-EA

Retail Rents

RESEARCH

2004 2005 2006 2007 2008 2009 2010 2011 2012

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

National Rent Growth

Source: NAR/CBRE-EA

Retail Sales Bouncing Back(% change from 12 month ago; excluding autos/parts)

Sluggish Retail Sector Job Gains(in thousands from 12 month ago)

Retail Vacancies

RESEARCH

San FranciscoMiami

Long IslandHonolulu

Orange CountyNATION

Las VegasTucson

DetroitCincinnati

Kansas City0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

6.7%

13.0%

18.3%

Selected Markets - 2011.Q1

Source: NAR/CBRE-EA

Sluggish Wholesale Trade Job Gains(in thousands from 12 month ago)

Multifamily Fundamentals

RESEARCH

2010.2 2010.3 2010.4 2011.1 2011.2 2011.3 2011.4

-40000

-20000

0

20000

40000

60000

80000

100000

120000

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Completions Absorption Vacancy Rate

Nr.

of U

nits

Perc

ent (

%)

Source: NAR/CBRE-EA

Multifamily Rents

RESEARCH

2004 2005 2006 2007 2008 2009 2010 2011 2012

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

National Rent Growth

Source: NAR/CBRE-EA

Renter HouseholdsIn million

Multifamily Vacancies

RESEARCH

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2.6%

5.9%

10.8%

Selected Markets - 2011.Q1

Source: NAR/CBRE-EA

Fundamentals

• Improving economy and job market• No overbuilding … increased absorption means

falling vacancy• Real estate hedge play from inflation

• But interest rates will be rising– Refinancing in 5 years ? … be prepared– Higher rents, but not necessarily higher property

prices from rising cap rates

Economic Forecast2011 2012

GDP Growth 2.5% 2.7%

Net New Jobs 1.8 million 2.0 million

CPI Inflation 2.9% 2.8%

10-year Treasury Rate 3.7% 4.4%

Unemployment Rate 8.8% 8.5%

Commercial Market Forecast2011 2012

Apartment Rent 3% to 4% 4% to 5%

Office Rent -1% to 0% 0% to 2%

Retail Rent -1% to 0% 0% to 2%

Industrial Rent -3% to -2% 1% to 3%

Property Price(Inflation hedge vs.

cap rate)

??? ???