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Presented By: CRE Market Dynamics Overview and Disruption Executive Real Estate Roundtable University of Denver – October 12 th , 2017 Lauren Foley Financial Specialist The views expressed here are my own and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

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Page 1: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

Presented By:

CRE Market DynamicsOverview and Disruption

Executive Real Estate RoundtableUniversity of Denver – October 12th, 2017

Lauren FoleyFinancial Specialist

The views expressed here are my own and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

Page 2: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

Current market dynamics Disruption in the CRE space CRE financing environment

AGENDA

Page 3: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017
Page 4: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

ECONOMIC EXPANSIONS

Source: National Bureau of Economic Research, Risk Analysis Unit/Federal Reserve Bank of Atlanta 4

Page 5: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

0

1,000

2,000

3,000

4,000

-1,000

-2,000

-3,000

-4,000

-5,000

-6,000

-7,000

YoY

Em

ploy

men

t Diff

eren

ce (

000s

)

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

NATIONAL EMPLOYMENT GAINS

Source: Bureau of Labor Statistics

99 months73 months

Page 6: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

U.S. EMPLOYMENT GAINS BY SECTORYEAR-AGO DIFFERENCE (000S)

Source: Bureau of Labor Statistics; Risk Analysis Unit/Federal Reserve Bank of Atlanta

Total Difference

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Aug-17 2007-2016 2016 % ChangeTotal 2,272 2,415 1,540 -757 -5,940 -947 1,588 2,230 2,209 2,558 2,876 2,492 2,097 7,848 $53,610 1.3%Nat. Resources 37 56 40 43 -73 11 83 60 15 28 -78 -136 58 -7 $56,110 -4.0%

Construction 360 355 -61 -468 -1,146 -498 15 112 210 295 310 250 206 -980 $58,640 2.9%

Manufacturing -89 -71 -276 -473 -1,559 -319 198 200 93 165 151 12 142 -1,807 $64,860 0.9%

Wholesale Trade 101 140 111 -72 -356 -134 91 123 66 81 41 12 68 -38 $73,710 0.5%

Retail Trade 221 74 167 -237 -761 -82 227 173 238 279 247 216 -29 467 $30,300 1.9%

Transp. & Utilities 103 103 76 -27 -271 -53 111 114 81 162 215 118 61 527 $50,440 1.0%

Information -57 -23 -6 -48 -180 -96 -34 2 30 20 24 23 -69 -266 $98,470 3.5%

Finance 92 170 -18 -142 -368 -143 2 87 103 91 147 161 151 -82 $88,820 1.0%

Professional Services 559 612 376 -207 -1,157 149 604 600 583 548 571 503 607 2,570 $69,960 1.0%

Educ. & Health 446 478 522 552 402 345 343 451 317 353 591 587 477 4,462 $48,060 1.4%

Leisure & Hospitality 323 294 317 10 -359 -29 304 416 486 442 464 460 333 2,510 $22,430 2.8%

Other Services -15 43 56 21 -149 -36 30 70 53 84 55 63 92 247 $35,920 2.3%

Government 183 170 244 291 45 -65 -404 -166 -68 29 147 194 2 249 $54,220 1.7%

SectorYear-Ago Difference (000s) Average Annual

Wage

Page 7: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

METRO JOB GROWTHAUGUST 2017 (YOY % CHANGE)

Source: Bureau of Labor Statistics

Page 8: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

U.S. UNEMPLOYMENT RATES AS OF AUGUST 2017

Source: Bureau of Labor Statistics, STL FRB FRED, Risk Analysis Unit/Federal Reserve Bank of Atlanta

Official Unemployment Rate (U-3) Plus discouraged workers (U-4)

Plus marginally attached workers (U-5) Plus marginally attached for economic reasons (U-6)

4

6

8

10

12

14

16

18

%, S

A

2000 2002 2004 2006 2008 2010 2012 2014 2016

Page 9: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

CRE VACANCY RATES

Data through 2Q 2017Source: AXIOMetrics, CBRE-EA, Risk Analysis Unit/Federal Reserve Bank of Atlanta

Page 10: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

U.S. COMPLETIONS AS A SHARE OF EXISTING CRE STOCK

Source: SupplyTrack, Risk Analysis Unit/Federal Reserve Bank of Atlanta

* YTD2017Q2 data; last two quarters forecasted

Page 11: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

ANALYZING THE CRE MARKET CYCLE

Phase 2 - Expansion Phase 3 - Mature

Phase 1 - Recovery Phase 4 - Downturn

Long-Term Occupancy

• Declining vacancy• New construction

• Increasing vacancy• New construction

• Declining vacancy• No new construction

• Declining vacancy• More completions

Demand/supplyEquilibrium Point

Rent growth < 0%

Rent growth below π

Rents rise rapidly toward new construction levels

High rent growth in a tight market

Rent growth positivebut declining

Rent growth below π& negative

Cost feasible new construction rents

Source: Mueller/Black Creek Group; Risk Analysis Unit/Federal Reserve Bank of Atlanta

Page 12: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

ANALYZING THE CRE MARKET CYCLE

Phase 2 - Expansion Phase 3 - Mature

Phase 1 - Recovery Phase 4 - Downturn

Long-Term Occupancy

• ↓ vacancy• New construction• ↑ ∆ Rent growth

• ↑ vacancy• New construction• ↓ ∆ Rent growth

• ↓ vacancy• No new construction• Rent growth < 0%; < π

• ↓ vacancy• More completions• Rent growth < π; < 0%

ApartmentsHotels

Office

Retail

Warehouse

Page 13: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017
Page 14: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

Moving from tradition Creativity is key = repurposing Technology Efficiency Mood retailing Experience-based

OVERVIEW

Page 15: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

RETAIL SQUARE FEET PER CAPITAN

umbe

r of R

etai

l Sq.

Ft.

Source: ICSC, CBRE-EA, Various

Page 16: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

TECHNOLOGICAL DISRUPTORS

Source: Amazon, Google, Dailydigi.com, various

Page 17: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

ON THE ROAD: UBER, LYFT, AND SELF-DRIVING CARS

Source: Google Images, Various

Page 18: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

AIRBNB VS HOSPITALITY: THE COMPETITION CONTINUES

Source: https://www.busbud.com/blog/airbnb-vs-hotel-rates/

Hotel Airbnb

5 6

Source: Busbud.com

Page 19: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

AIRBNB VS HOSPITALITY: THE COMPETITION CONTINUES

A rendering of a room in the Marriott Moxyhotel in Times Square, set to open this summer. Rooms in the hotel are 183 square feet, creating a space challenge in keeping with living in the Big Apple.-Marriott Hotel

Source: https://www.nytimes.com/2017/05/29/travel/hotels-feeling-the-pinch-of-airbnb-promote-local-experiences.htmlSource: Google Images

Page 20: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

OFFICE SPACE (NOT THE MOVIE)

Source: Google Images, Wework.com

Page 21: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017
Page 22: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

FUNDING FOR TOTAL CRE MORTGAGES

Source: Z.1 Financial Accounts of the United States/U.S. Board of Governors of the Federal Reserve System (FRB); Risk Analysis Unit calculations

Page 23: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

CMBS ISSUANCE

Source: Securities Industry and Financial Markets Association (SIFMA); Risk Analysis Unit/FRB Atlanta

Billi

ons

US

D ($

)

Page 24: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

DEPOSITORY INSTITUTIONS’ SHARE OF COMMERCIAL MORTGAGES

Source: Z.1 Financial Accounts of the United States/U.S. Board of Governors of the Federal Reserve System (FRB); Risk Analysis Unit calculations

Page 25: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

-20%

0%

20%

40%

2014 2015 2016 2017Net

Per

cent

of R

esp

ond

ents

Tig

hten

ing

Underwriting

BANK SENTIMENT

Source: Senior Loan Officer Survey/Federal Reserve; Risk Analysis Unit/FRB Atlanta

-20%

0%

20%

40%

60%

2014 2015 2016 2017

Net

Per

cent

age

Rep

ortin

g In

crea

sed

Dem

and

for N

ew

Loa

ns

Loan Demand

Page 26: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

LENDING SOURCE MARKET SHARECRE Loans

Source: Real Capital Analytics / FRB Atlanta Risk Analysis Unit

Page 27: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

BANK CRE EXPOSURES

Source: Bank Call Reports

Page 28: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

COMMERCIAL BANK CRE GUIDELINE EXPOSURES

Source: Bank Call Reports; Risk Analysis Unit/Federal Reserve Bank of Atlanta

Page 29: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

POTENTIALLY TROUBLED CRE BANK LOANSSeptember 2017 (sized by relative loan amounts)

Note: Includes loans > $2.5 million

Source: Real Capital Analytics; Risk Analysis Unit

Page 30: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

POTENTIALLY TROUBLED CRE BANK LOANSSeptember 2017 (sized by relative loan amounts)

Note: Includes loans > $2.5 million

Source: Real Capital Analytics; Risk Analysis Unit

Page 31: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

POTENTIALLY TROUBLED CRE BANK LOANSSeptember 2017 (sized by relative loan amounts)

Note: Includes loans > $2.5 million

Source: Real Capital Analytics; Risk Analysis Unit

Page 32: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

COMMERCIAL REAL ESTATE CAP RATESCapital Markets

Source: Real Capital Analytics/FRED /FRB Atlanta Risk Analysis Unit

Page 33: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

CAP RATE SPREADSAs of 2Q 2017

Source: CoStar Portfolio Strategy

Page 34: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

TAKEAWAYS

• National economic conditions continue to indicate modest growth which should continue to propel most CRE dynamics.

• Job growth conditions in some local markets are not as robust as those at the national level and may create a headwind for CRE.

• Conditions in the luxury apartment, limited-service hotel and retail appears to indicate enhanced risk in each sector.

• Heightened apartment completion rates and retailer bankruptcies continue to add risk to each sector.

• CRE exposure at Community and Regional Banks has generally increased since 2012.

• CRE Cap Rates remain an area of added risk. Especially, transactions that utilize 1031 Tax-Free Exchanges.

Page 35: CRE Market Dynamics - Daniels College of Business · CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable. University of Denver – October 12. th, 2017

The views expressed here are my own and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve System.