Outlook for Commercial Real Estate in the
Near and Long Term
UC Real Estate RoundtableNovember 2, 2012
Calvin SchnureVP, Research & Industry Information
NAREIT
Fundamentals still support the commercial real estate recovery, despite the weak macro news• Economic growth is disappointing—extremely—but
weakness is cyclical, not structural;
• Drags on GDP growth are set to fade, while sources of strength build;
• Momentum to pick up slowly through 2013, 2014;
• Commercial real estate markets are facing low new supply, considerable pent-up demand.
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The “Tug of War” on economic growth:
Drags
• Housing crisis/ mortgage mess/ deleveraging
• Fiscal drag, incl. state & local
• Uncertainty, lack of confidence… and Europe, US fiscal cliff
Sources of strength
• Productivity growth
• Monetary policy
• Growing pent-up demand
3
• Wealth effect
Longer-term Outlook
When did the “New Normal” begin?
4Source: Bureau of Labor Statistics, Haver Analytics.
Months since trough
Longer-term Outlook
-1
0
1
2
3
4
1960 - 2008:Q2 2008:Q3 - 2009:Q4 2010:Q1 - 2010:Q3 2010:Q4 - 2012:Q2
“New Normal”? Private sector GDP growth is in line with history
5Source: U.S. Bureau of Economic Analysis, Haver Analytics.
Longer-term Outlook
Contribution to GDP growth, in percentage points
Federal GovernmentPrivate sector
State and Local Governments
Productivity growth hasn’t flagged
6Source: U.S. Census Bureau, Haver Analytics.
“Stagflation” was the original “New Normal”
Longer-term Outlook
-6
-4
-2
0
2
4
6
8
1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Percent change
1-year change
3-year change
The "Lost Decade" is into re-runs
7
Productivity growth stagnated during Japan’s “Lost Decade”
Source: Haver Analytics
Wealth effects: shifting from negative to positive
8Source: Federal Reserve Board Flow of Funds Accounts, Bureau of Economic Analysis.
Longer-term Outlook
Monetary policy is supportive
9Source: Federal Reserve Board.
Longer-term Outlook
State of Commercial Real Estate
• Q3 saw modest improvements nationwide;– Multifamily: vacancy rates slide lower still, rent
growth slows;– Office: vacancies edging down, rent growth weak.
CBD vs suburban;– Retail: regional malls seeing improvements in
vacancies, rents, while neighborhood and community centers lag.
• A puzzle: the macro economy is at a crawl; why did CRE show any improvement?– New supply is negligible, so even a tiny bit of
absorption yields improvements.– But robust gains will need a robust macroeconomy.
• Rates are low but access to financing still tight.10
Construction at decades-low levels generates more pent-up demand
11Source: U.S. Census Bureau, Haver Analytics.
Longer-term Outlook
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Borrowing demand for commercial mortgages is gaining momentum
Source: Federal Reserve Board Senior Loan Officer Survey, October 2012.
13
But standards are still tight
Source: Federal Reserve Board Senior Loan Officer Survey, October 2012.
14
Forecasters have been expecting long term interest rates to rise… for a decade, now.
Percent
0
1
2
3
4
5
6
0
1
2
3
4
5
6
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Actual 10-year Treasury yield (solid black line)
Predictions out to five quarters ahead of professional forecasters (hatched lines)
Percent
Source: Philadelphia Federal Reserve Survey of Professional Forecasters, Bloomberg
Pent-up demand continues to drive multifamily sector, while new supply still falls short
• Market conditions in multifamily rental housing have tightened since the housing crisis began;
• Sustained low household formation has caused unprecedented pent-up demand;
• New supply falls far short of potential demand;
• Key factor limiting rent growth: wages.
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Focus onMultifamily
0
1
2
3
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
16
Household formation plunged during the Great Recession, remains less than half its trend pace
Percent change over year ago
Fitted Trend
Source: U.S. Census Bureau, Haver Analytics.
Focus onMultifamily
20
21
22
23
24
25
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
17
Millions have moved in with parents, other family, or nonfamily housemates
Shared households, percent of total
The number of shared households, defined as
those with an extra adult, rose 2.9 million in 2008-
2010.
Source: U.S. Census Bureau, Haver Analytics.
Focus onMultifamily
0
100
200
300
400
500
600
2000 2002 2004 2006 2008 2010 2012
Average, 2000-2007
18
Multifamily housing construction since 2008 has totaled 700,000 below the prior trend paceThousands of units, seasonally-adjusted annual rate
Source: U.S. Census Bureau, Haver Analytics.
Focus onMultifamily
REIT acquisitions benefit from access to capital, market discipline
• The REIT business model influences property acquisitions in two ways:– Access to capital allows REITs to buy properties
when they are available at attractive prices—rather than being rationed by credit standards or driven by investment fund flows;
– Market discipline discourages REITs from over-paying at the market peak—in fact, REITs sold at the top of the 2000s boom.
• REIT acquisitions early in a price cycle add value over the long haul… and REITs are the main buyers today.
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Focus onAcquisitions
20
Commercial Property Prices
Source: NARIET Pure Property Index®
Percent change over year ago
Focus onAcquisitions
Gross Acquisitions and Dispositions
21Source: RCA
Focus onAcquisitions
Net Acquisitions Adjusted*
22Source: RCA
* Adjusted to remove the Equity Office and Archstone transactions
Focus onAcquisitions
0
10
20
30
40
50
60
2004 2005 2006 2007 2008 2009 2010 2011 2012*
Debt
Preferred shares
IPO
Secondary equity offerings
Billions of dollars
23
REITs are raising record amounts of capital
*2012 offerings through July. Source: SNL Financial, NAREIT.
Focus onAcquisitions
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Pre-boom
2001-2003$ Millions
Boom and market peak2004-2007
$ Millions
Bust
2008-2009$ Millions
Recovery
2010-Current
$ MillionsTotal
$ Millions
REITs
15,400
(20,898)
(7,425)
27,313
14,390
Private
11,760 (81,483)
9,120
(22,957)
(22,360)
Inst'l/Eq
(13,101)
141,731
5,579
(2,439)
131,771 Cross-Border
736
38,140
2,533
1,054
42,464
Other
(14,795)
(77,490)
(9,808)
(2,971) (166,264)
Net Acquisitions… buy low, sell high
Source: RCA
Focus onAcquisitions
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