may 2016 economic and commercial real estate outlook

LAWRENCE YUN, PhD

Chief Economist, Sr. VP National Association of

REALTORS®

MARK VITNER

Managing Director, Sr. Economist Wells Fargo Securities

Commercial Real Estate in 2016: New Challenges

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LAWRENCE YUN, PhD NATIONAL ASSOCIATION OF REALTORS

Chief Economist and Senior Vice President of Research

Lawrence Yun is Chief Economist and Senior Vice President of Research at the NATIONAL ASSOCIATION OF REALTORS. He oversees and is responsible for a wide range of research activity for the association including NAR’s Existing Home Sales statistics, Affordability Index, and Home Buyers and Sellers Profile Report. He regularly provides commentary on real estate market trends for its 1.1 million REALTOR members.

Dr. Yun creates NAR’s forecasts and participates in many economic forecasting panels, among them the Blue Chip Council and the Harvard University Industrial Economist Council. He appears regularly on financial news outlets, is a frequent speaker at real estate conferences throughout the United States, and has testified before Congress. Dr. Yun appears often as a guest on CSPAN’s Washington Journal and is a regular guest columnist on the Forbes website.

Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from the University of Maryland at College Park.

MARK VITNER WELLS FARGO SECURITIES, LLC

Managing Director, Senior Economist

Mark Vitner is a managing director and senior economist at Wells Fargo, responsible for tracking U.S. and regional economic trends. Based in Charlotte, he also writes for the company’s Monthly Economic Outlook report, the Weekly Economic & Financial Commentary, and provides regular updates on the housing markets, commercial real estate, regional economies, and inflation. Mark’s commentary has been featured in the New York Times, Wall Street Journal, Bloomberg, and many other publications.

Mark joined Wachovia (then First Union) in 1993. Before that, he spent nine years as an economist for Barnett Banks in Jacksonville, Fla. Originally from Atlanta, Mark earned his B.B.A. in economics from the University of Georgia, an M.B.A. from the University of North Florida, and has completed further graduate work in economics at the University of Florida. He also completed the National Association of Business Economics (NABE) Advanced Training in Economics program at Carnegie Mellon University.

Mark is a member of the National Association of Business Economists and co-founded its Charlotte chapter, The Charlotte Economics Club. He serves as a distinguished lecturer and practitioner at the University of Georgia. He is also a member of the American Economic Association, the American Real Estate and Urban Economics Association, and the Charlotte Chapter of the Association for Corporate Growth. Mark currently chairs the Economic Advisory Council for the California Chamber of

Commerce and serves as the chief economist for the North Carolina CCIM.

COMMERCIAL REAL ESTATE AND

ECONOMIC OUTLOOK

LAWRENCE YUN, PH.D.

CHIEF ECONOMIST

NATIONAL ASSOCIATION OF REALTORS®

PRESENTATION IN WASHINGTON, D.C.

MAY 12, 2016

COMMERCIAL INVESTMENT SALES OF LARGE PROPERTIES (PROPERTIES VALUED AT $2.5 MILLION AND OVER)

COMMERCIAL PROPERTY PRICE INDEX

Source: Federal Reserve

SIOR CRE INDEX

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Northeast Midwest South West

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Industrial Office

APARTMENT

%

OFFICE

%

INDUSTRIAL-WAREHOUSE

%

RETAIL

%

REALTOR® DEAL SIZE (NOT $2.5 MILLION PROPERTIES)

CRE PRICES: SMALL VS. LARGE MARKETS

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

20

08

.Q4

20

09

.Q1

20

09

.Q2

20

09

.Q3

20

09

.Q4

20

10

.Q1

20

10

.Q2

20

10

.Q3

20

10

.Q4

20

11

.Q1

20

11

.Q2

20

11

.Q3

20

11

.Q4

20

12

.Q1

20

12

.Q2

20

12

.Q3

20

12

.Q4

20

13

.Q1

20

13

.Q2

20

13

.Q3

20

13

.Q4

20

14

.Q1

20

14

.Q2

20

14

.Q3

20

14

.Q4

20

15

.Q1

20

15

.Q2

20

15

.Q3

Sales Prices (YoY % Chg)

Real Capital Analytics CRE Markets REALTOR® CRE Markets

Sources: NAR, Real Capital Analytics

CRE SALES: SMALL VS. LARGE MARKETS

-100%

-50%

0%

50%

100%

150%

200%

20

08

.Q4

20

09

.Q1

20

09

.Q2

20

09

.Q3

20

09

.Q4

20

10

.Q1

20

10

.Q2

20

10

.Q3

20

10

.Q4

20

11

.Q1

20

11

.Q2

20

11

.Q3

20

11

.Q4

20

12

.Q1

20

12

.Q2

20

12

.Q3

20

12

.Q4

20

13

.Q1

20

13

.Q2

20

13

.Q3

20

13

.Q4

20

14

.Q1

20

14

.Q2

20

14

.Q3

20

14

.Q4

20

15

.Q1

20

15

.Q2

20

15

.Q3

Sales Volume (YoY % Chg)

Real Capital Analytics CRE Markets REALTOR® CRE Markets

Sources: NAR, Real Capital Analytics

CRE FINANCING: SMALL VS. LARGE MARKETS

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016

REALTOR® CRE Lending Sources

Small BusinessAdministrationREITs

Regional Banks

Public Cos.

Private Investors

Other

National Banks

Local/Comm. Banks

Life Insurance Cos.

International banks

Credit Unions

CMBS

Source: NAR

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015

RCA Lending Sources ($2.5M+)

Pvt/Other

Reg'l/LocalBank

Nat'l Bank

Int'l Bank

Insurance

Gov't Agency

Financial

CMBS

Source: Real Capital Analytics

BANKS AND CRE LENDING

59%

41%

Does Bank Capital for CRE Remain Obstacle to Sales?

Yes No

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015 2016

Causes of Insufficient Bank Capital for CRE Lending:

Other, please specify

Global economic uncertainty

U.S. Economic uncertainty

Inability of banks to disposeof distressed assets

New/proposed US legislativeand regulatory initiatives

Regulatory uncertainty forfinancial institutions

Slow-down inpooling/packaging of CMBS

Reduced NOI, propertyvalues, and equity

Source: NAR

LOAN-TO-VALUE FINANCING TERMS

27% 33% 30% 28% 26%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016

Average Loan-to-Value for CRE Transactions

Other

100% Cash

50%

55%

60%

65%

70%

75%

80%

85%

90%

LENDING CONDITIONS IN SMALLER CRE

MARKETS

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016

Change in Lending Conditions over Past Year

Eased Significantly

Eased Somewhat

Not Changed

Tightened Somewhat

Tightened Significantly

ECONOMIC BACKDROP

LIFETIME WEALTH AT NEAR ALL-TIME HIGH

MEDIAN HOUSEHOLD INCOME (INFLATION ADJUSTED)

ANNUAL GDP … BELOW 3% FOR 11 STRAIGHT YEARS

SLUGGISH GDP AND GAP AFTER RECESSION ($2.5 TRILLION GAP … $7,000 PER PERSON)

3% Growth Line

Slow 2% Growth Line

SLUGGISH BUSINESS SPENDING

DESPITE HIGH PROFIT

CONSUMER SPENDING GROWTH

INTERNATIONAL TRADE FALLING

$ million

TRADE BALANCE AS % OF GDP

MANUFACTURING JOBS

AVERAGE WEEKLY LABOR HOURS IN

MANUFACTURING INDUSTRY

WIDENING JOBS

MOBILE AND CHARLESTON SC

BOEING AIRPLANE MADE IN CHARLESTON

WIDENING JOBS

NASHVILLE AND MEMPHIS

WIDENING JOBS

GRAND RAPIDS AND FLINT

JOBS (8 MILLION LOST … 14 MILLION GAINED)

In thousands

UNEMPLOYED AND OUT-OF-LABOR FORCE

TOP AND BOTTOM STATES FOR JOBS

The Best % Gain in 12 months

Idaho 3.8

Utah 3.5

Nevada 3.4

Florida 3.0

Washington 3.0

California 2.9

South Carolina 2.9

Oregon 2.7

Arizona 2.3

The Worst % Gain in 12 months

Wyoming 0.2

Oklahoma 0.1

Louisiana -0.4

West Virginia -1.8

North Dakota -2.0

STATE LEVEL EMPLOYMENT

FEDERAL DEBT … CUMULATIVE ( $ MILLION; DEBT HELD BY PUBLIC EXCLUDING INTRA-GOVERNMENTAL

HOLDINGS)

QUANTITATIVE EASING

NO CPI INFLATION – YET

U.S. DOLLAR REVERSING THE DECLINE … STRONGER AND STRONGER

NEGATIVE INTEREST RATES

GOOD-BYE BEN?

FED RATE HIKE IN DECEMBER

AGAIN IN JULY

AGAIN IN NOVEMBER

AGAIN 4-TIMES IN 2017

ANOTHER 4-TIMES IN 2018

FED POLICY AND LONG-TERM RATES

LAWRENCE YUN, PhD


REALTORS®

MARK VITNER



U.S. Economic Outlook

Mark Vitner, Managing Director & Senior Economist

May 12, 2016

Economic Outlook 48

Economic Growth Remains Relatively Sluggish

Overall Outlook

Monetary Policy The Fed’s initial rate hike came late in the cycle, amid

circumstances more consistent with a rate cut and led to a spike in volatility. The Fed will proceed cautiously.

Consumer Consumer spending is growing solidly but has not

benefitted much from lower gasoline prices due to rising healthcare and housing costs.

Demographics

The rise of Millennials has raised questions about shopping patterns. This generation faces more constraints on discretionary spending but is also more mobile and more apt to shop online.

Global

Economy

Slower growth in China continues to weigh on global economic growth, impacting commodity producers the most. Weaker demand growth in Asia has slowed global trade but imports into the U.S. remain strong.

Real GDP is expected to grow 1.6 percent in 2016. Growth is being driven by consumer spending and homebuilding, which is offsetting sluggish global influences.

Economic Outlook 49 49

Economic Growth

Real GDP growth has been disappointing throughout most of this recovery and has also been unusually volatile. Much of the recent volatility is due to swings in international trade and

business inventories. Private final domestic demand is growing more solidly and consistently.

Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Real Private Final Sales Real GDP Forecast

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2000 2002 2004 2006 2008 2010 2012 2014 2016

U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change

GDP - CAGR: Q1 @ 0.5%

GDP - Yr/Yr Percent Change: Q1 @ 1.9%

Forecast

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Real Private Final Sales to Domestic PurchasersBars = CAGR Line = Yr/Yr Percent Change

Real Priv Fin Sales to Dom. Purch. - CAGR: Q1 @ 1.2%

Real Priv Fin Sales to Dom. Purch. - Yr/Yr Pct Chg: Q1 @ 2.6%

Forecast

49


Employment Situation

Solid month to month job gains have largely put recession fears to rest. Unemployment continues to trend lower and is close to most measures of “full employment.” The Fed is taking

its queue from the strengthening labor market but taking a big picture view.

Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Unemployment Rate Nonfarm Employment

-1,000

-800

-600

-400

-200

0

200

400

600

-1,000

-800

-600

-400

-200

0

200

400

600

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Nonfarm Employment ChangeChange in Employment, In Thousands

Monthly Change: Apr @ 160K

0%

2%

4%

6%

8%

10%

12%

0%

2%

4%

6%

8%

10%

12%

65 70 75 80 85 90 95 00 05 10 15

Unemployment and Wage RatesWages for Production & Nonsupervisory Workers, SA

Unemployment Rate: Apr @ 5.0%

Hourly Earnings - Yr/Yr % Change: Apr @ 2.5%

50

Economic Outlook

Employment Growth of U.S. MSAs

Atlanta

Miami

Washington, D.C.

Houston

Los Angeles

San Francisco

Philadelphia

Dallas

Phoenix

Charlotte

Detroit

Seattle

Chicago

Minneapolis

San Diego

Tampa

St. Louis

Baltimore

New York

San Jose

Las Vegas

Richmond

-2%

-1%

0%

1%

2%

3%

4%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

3-M

onth

Annualized P

erc

ent

Change

Year-over-Year Percent Change

U.S. Employment Growth by MSA3-Month Moving Averages, March 2016

Percent of Total Employees

Less than 4%

4% to 6%

More than 6%

Expanding

Decelerating

Expanding

Decelerating

Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC


Consumer Confidence

Consumer Confidence has fallen back a bit in recent months, reflecting growing concerns about slower global economic conditions and financial market volatility.

Source: The Conference Board, S&P and Wells Fargo Securities, LLC

Present Situation vs. Future Expectations Consumer Confidence

0

300

600

900

1,200

1,500

1,800

2,100

2,400

0

20

40

60

80

100

120

140

160

94 96 98 00 02 04 06 08 10 12 14 16

Consumer Confidence Index and S&P 500Conference Board

Confidence: Apr @ 94.2 (Left Axis)

S&P 500: Apr @ 2,075.5 (Right Axis)

0

50

100

150

200

250

0

50

100

150

200

250

87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

Conference Board Consumer ConfidencePresent Situation and Expectations Index

Present Situation Yr/Yr % Chg: Apr @ 10.8%

Expectations Yr/Yr % Chg: Apr @ -9.0%

Present Situation: Apr @ 116.4

Expectations: Apr @ 79.3

52

Wells Fargo Economics 53

0

1

2

3

4

5

6

0

1

2

3

4

5

6

16 26 36 46 56 66 76 86 96

Thousands

Thousands

U.S. Working-Age Population DistributionMillions of Persons in Age Group, 2014

Millennials: 33% Boomers: 30%Gen X: 24% Silent Gen: 12%

G.I. Gen: 1%

Demographic Breakdown

Millennials are now the country’s largest and most

diverse generation.


Wells Fargo Economics 54 54

U.S. Housing Market

Despite some recent setbacks, we continue to look for a gradual recovery in homebuilding. The homeownership rate has begun to stabilize.

Source: NAR, CoreLogic, U.S. Department of Commerce and Wells Fargo Securities, LLC

Owners vs. Renters Homeownership

62%

63%

64%

65%

66%

67%

68%

69%

70%

-24%

-18%

-12%

-6%

0%

6%

12%

18%

24%

88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

CoreLogic National Home Price Index vs.

Homeownership Rate

Home Price Index Yr/Yr: Q4 @ 5.5% (Left Axis)

Homeownership Rate: Q1 @ 63.5% (Right Axis)

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

02 04 06 08 10 12 14 16

Thousands

Thousands

Household FormationsMillions, Year-over-Year Difference

Renters: Q1 @ 0.4M

Homeowners: Q1 @ 0.2M

Economic Outlook 55

Gradual Recovery in Homebuilding

We continue to look for a gradual recovery in

homebuilding.

Single-family construction has been slow to come back on track with long-held norms relative to

population and employment growth. We look for stronger

gains this year, but improvement will remain

excruciatingly slow.


0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Thousands

Housing StartsMillions of Units

Multifamily Starts

Multifamily Forecast

Single-family Starts

Single-family Forecast

Forecast

Economic Outlook 56

Interest Rates

Even after scaling back its expectations, the FOMC still has much more tightening in 2016

and 2017 than the financial markets expect.

We continue to look for two quarter-point rate hikes this

year but the timing will be tricky for the Fed, depending on

swings in economic data in the U.S. and overseas as well as

geopolitical events. 0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Appropriate Pace of Policy FirmingTarget Federal Funds Rate at Year-End

March 2016 Median Response

December 2015 Median Response

December 2014 Median Response

Futures Market: May 6

2016 Longer Run2017 2018

Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities, LLC

Economic Outlook 57

Probability of Recession

According to our preferred model, the probability of a

recession has ticked up.

That said, the level still suggests very little possibility of a

recession in the near term.

0%

20%

40%

60%

80%

100%

120%

0%

20%

40%

60%

80%

100%

120%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Recession Probability Based on Probit Model Model with LEI

Two-Quarter Ahead Recession Probability: Q1 @ 25.7%

Source: Wells Fargo Securities, LLC

Global Economy

Economic Outlook 59

-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%

7.5%

-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%

7.5%

1980 1985 1990 1995 2000 2005 2010 2015

Real Global GDP GrowthYear-over-Year Percent Change, PPP Weights

Period Average

WF

Forecast

Global Forecast

Growth in the global economy remains below its long-run

average.

Source: International Monetary Fund and Wells Fargo Securities, LLC

Economic Outlook 60

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

92 94 96 98 00 02 04 06 08 10 12 14 16

Global Export VolumesYear-over-Year Percent Change

Real Exports: Feb @ -0.2%

Average 1992-Present: 5.5%

Global Exports

Global trade has slowed over the past year, as demand for

commodities has weakened and developed countries are

exporting fewer capital goods.

Source: IHS Global Insight and Wells Fargo Securities, LLC

Economic Outlook 61

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

2012 2013 2014 2015 2016

3-Month Interbank Offered Rates

Eurozone: May-2 @ -0.25%

Denmark: May-2 @ -0.08%

Sweden: May-2 @ -0.45%

Switzerland: Apr-29 @ -0.73%

Negative Rates

The effectiveness of negative interest rates is still very much in debate. While lower interest

rates have smoothed adjustments in sectors

undergoing massive change, negative interest rates may have

prolonged the process and weakened the financial system.

Source: Bloomberg LP and Wells Fargo Securities, LLC

Economic Outlook 62

-$300

-$200

-$100

$0

$100

$200

$300

$400

$500

$600

-$300

-$200

-$100

$0

$100

$200

$300

$400

$500

$600

04 05 06 07 08 09 10 11 12 13 14 15 16

Foreign Private Purchases of U.S. Securities 12-Month Moving Sum, Billions of Dollars

Treasury: Feb @ $308.1 BillionEquity: Feb @ -$123.6 BillionAgency: Feb @ $124.8 BillionCorporate: Feb @ $138.5 Billion

Foreign Purchases of U.S. Securities: Still Solid

Capital flows and asset allocation by global investors

play a strong role in rate determinations.

Source: U.S. Department of the Treasury and Wells Fargo Securities, LLC

Economic Outlook 63

China Real GDP

We forecast that growth in China will slow further, but we do not expect the economy to

completely fall apart.

Source: Bloomberg LP and Wells Fargo Securities, LLC

0%

2%

4%

6%

8%

10%

12%

14%

16%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Chinese Real GDP ForecastYear-over-Year Percent Change

Year-over-Year Percent Change: Q1 @ 6.7%

WF

Fcst.

Real Estate

Economic Outlook 65

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Origin of Capital Going Into the United StatesFor Commercial Real Estate, In Billions

Europe: Q1 @ $19.3B

Canada: Q1 @$18.0B

Middle East & Africa: Q1 @$12.9B

Asia: Q1 @ $22.0B

Australia: Q1 @ $1.9B

Latin America: Q1 @ $1.4B

Foreign Capital Inflow

The United States continues to be perceived a safe haven for

foreign investment.

Source: RCA , Inc. and Wells Fargo Securities, LLC


Cross-Border Investment

Over the past five years, Manhattan, Los Angeles, Boston and Dallas have been preferred markets for foreign investors.

Source: RCA and Wells Fargo Securities, LLC

Top Countries of Origin Top Market Destinations

Total Number

of Properties

Total Volume

(In Billions)

297 $57.52

257 $14.77

160 $11.40

629 $10.55

312 $10.13

84 $9.64

163 $8.54

194 $6.86

170 $6.02

4,733 $93.30

Total 6,999 $228.74

Washington, D.C.

San Francisco

Houston

Seattle

Other

Dallas

Chicago

Top Cross-Border U.S. Market Destinations

Domestic Markets

(2011-2015)

Manhattan

Los Angeles

Boston

$2.9B

$3.3B

$4.5B

$5.1B

$6.0B

$7.1B

$8.5B

$14.9B

$17.2B

$24.9B

$0 $5 $10 $15 $20 $25 $30

Australia

South Korea

Qatar

UAE

China

Germany

Norway

Singapore

Other

Canada

Cross-Border Capital into the U.S.In Billions of U.S. Dollars

As of 2015

Economic Outlook 67

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

94 96 98 00 02 04 06 08 10 12 14 16 18

Private Nonresidential Construction Put-in-PlaceYear-over-Year Percent Change

Industrial: 2015 @ 44.6%

Commercial: 2015 @ 6.7%

Institutional: 2015 @ 11.0%

Forecast

Nonresidential Construction

Private construction spending continues to improve, but the

pace is moderating.


Economic Outlook 68

0%

4%

8%

12%

16%

20%

24%

0%

4%

8%

12%

16%

20%

24%

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Commercial Real Estate Vacancy RatesPercent

Office Vacancy Rate: Q1 @ 16.1%

Industrial Vacancy Rate: Q1 @ 5.8%

Retail Vacancy Rate: Q1 @ 10.0%

Apartment Vacancy Rate: Q1 @ 4.5%

Vacancy Rates

Office and retail vacancy rates have only modestly edged lower

in recent years, which means there have been a fairly limited

number of opportunities for new development.

The apartment and industrial market have been helped by demographic and structural

shifts that have boosted demand in recent years.

Source: REIS, Inc., CoStar Realty Information and Wells Fargo Securities, LLC

Economic Outlook 69

-20%

-15%

-10%

-5%

0%

5%

10%

-20%

-15%

-10%

-5%

0%

5%

10%

2009 2010 2011 2012 2013 2014 2015 2016 2017

Effective Revenue by Property TypeYear-over-Year Percent Change

Apartment: 2016 (Projected) @ 5.8%

Office: 2016 (Projected) @ 5.5%

Retail: 2016 (Projected) @ 2.9%

Industrial: 2016 (Projected) @ 6.5%

Hotel: 2016 (Projected) @ 3.0%

Forecast

Effective Revenue

Overall effective revenue growth, which is the product of

occupied stock and effective rent, continues to improve.

Source: Reis, Inc., CoStar Realty Information, Inc. and Wells Fargo Securities, LLC

Economic Outlook 70

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Commercial Real Estate Asking Rent GrowthQuarter-over-Quarter Percent Change

Apartment Asking Rent Growth: Q1 @ 0.4%

Retail Asking Rent Growth: Q1 @ 0.5%

Office Asking Rent Growth: Q1 @ 0.9%

Industrial Asking Rent Growth: Q1 @ 1.5%

Rent Growth

A surge in apartment deliveries late last year has pulled apartment rents lower.

Source: REIS, Inc., CoStar Realty Information and Wells Fargo Securities, LLC

Economic Outlook 71

Construction Supply

Source: CoStar Realty Information, Inc., Reis, Inc. , Property and Portfolio Research and Wells Fargo Securities, LLC

Apartment

3- Yr.

Supply

Growth

Hotel Metro

3- Yr.

Supply

Growth

Warehouse

3- Yr.

Supply

Growth

Office

3- Yr.

Supply

Growth

Retail

3- Yr.

Supply

Growth

New York Metro 17.5% New York 15.9% Inland Empire 14.5% Oklahoma City 11.3% Charlotte 4.5%

Nashville 13.0% Cleveland 10.5% Atlanta 10.1% Nashville 8.3% Richmond 4.4%

Charlotte 10.6% Miami 10.3% Dallas - Fort Worth 9.2% Austin 8.1% Raleigh-Durham 3.7%

Charleston 10.5% Boston 9.8% Las Vegas 8.4% Dallas 7.9% Kansas City 3.6%

Seattle 10.2% Palm Beach County 9.1% Austin 8.4% Houston 6.2% Cincinnati 3.6%

District of Columbia 9.9% Austin 9.0% Phoenix 7.5% Charlotte 5.3% Austin 3.3%

Chattanooga 9.6% Houston 8.6% San Antonio 6.8% Kansas City 4.6% Winston-Salem 3.2%

Miami 8.7% Denver 8.6% Oklahoma City 6.3% Charleston 4.4% Baltimore 3.1%

Austin 8.6% Minneapolis 8.5% Nashville 6.1% Milwaukee 4.4% San Francisco 3.1%

Greenville 7.9% Nashville 8.4% Washington D.C. 5.8% Denver 4.0% Northern New Jersey 3.0%

National 5.0% National 6.1% National 4.7% National 3.5% National 2.1%

Note: Supply growth is the cumulative supply expected to be added through 2018 as a percentage of current inventory.

-2%

0%

2%

4%

6%

8%

10%

-2%

0%

2%

4%

6%

8%

10%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Completions as a Percent of InventoryPercent

Apartment: 2016 (Projected) @ 2.4%

Office: 2016 (Projected) @ 1.0%

Retail: 2016 (Projected) @ 0.5%

Industrial: 2016 (Projected) @ 1.6%

Hotel: 2016 (Projected) @ 2.2%

Aggregate: 2016 (Projected) @ 1.5%

Avg. '85-'89=4.8%

Avg. '97-'01=2.5%

Avg. '04-'08=1.3%

Avg. '12-'16F=0.98%


Hotel Real Revenue Per Available Room

Although real RevPAR is still improving, the pace began slowing noticeably in the fourth quarter of 2015 and continued to moderate in the first quarter. Moreover, the rate of real

RevPAR growth for lower-end hotels, fell into negative territory in the first quarter.

Source: Smith Travel Research and Wells Fargo Securities, LLC

Occupancy Rate Real RevPAR vs. Real ADR

-20%

-15%

-10%

-5%

0%

5%

10%

-20%

-15%

-10%

-5%

0%

5%

10%

88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Real RevPAR vs. Real ADRSeasonally Adjusted, Year-over-Year Percent Change

Real RevPAR: Q1 @ 1.4%

Real ADR: Q1 @ 2.2%50%

52%

54%

56%

58%

60%

62%

64%

66%

68%

50%

52%

54%

56%

58%

60%

62%

64%

66%

68%

87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

Occupancy Rate CyclesSeasonlly Adjusted, Percent

Peak: 1994Q4 @ 65.2%

Peak: 2006Q1 @ 64.1%

Peak?: 2015Q4 @ 65.9%

Trough: 2001Q4 @ 57.5%

Trough: 2009Q2 @ 54.1%

Trough: 1991Q1 @ 60.9%


Bank Lending

The net percentage of lenders reporting stronger demand for construction loans has been edging lower in recent quarters, while the proportion of banks tightening their lending

standards has gradually edged higher. Multifamily projects have led the way.

Source: Federal Reserve Board and Wells Fargo Securities, LLC

Tightening Standards Demand

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

95 97 99 01 03 05 07 09 11 13 15

Net Percent of Banks Reporting Stronger DemandCommercial Real Estate Loans

Total CRE (Series Ends in 2013): Q3 @ 47.9%Nonfarm Nonresidential: Q1 @ 9.9%Multifamily Residential: Q1 @ 8.5%Construction & Land Development: Q1 @ 8.5%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

95 97 99 01 03 05 07 09 11 13 15

Net Percent of Banks Tightening StandardsCommercial Real Estate Loans

Total CRE (Series Ends in 2013): Q3 @ -19.2%

Nonfarm Nonresidential: Q1 @ 5.6%

Multifamily Residential: Q1 @ 22.5%

Construction & Land Development: Q1 @ 12.7%

Economic Outlook 74

Five Critical Key Takeaways

Economic Outlook

Weaker Global Growth

Weaker global growth continues to pull at industries closely tied to it, creating a disinflationary undertow that is squeezing corporate profits and capital spending.

Interest Rates The Federal Reserve has begun to ‘normalize’ interest

rates amid a challenging backdrop. Policymakers will likely move very gradually and cautiously.

The Housing Recovery

Demand for single-family homes is reviving, with first-time homebuyers beginning to come back into the market. Apartment construction is close to peaking.

The Mix of Growth is Shifting

The economy is better for consumers than producers. Regions exposed to agriculture, energy, mining and manufacturing are seeing conditions weaken.

The economy should weather the global slowdown. Exports have clearly decelerated. We expect real GDP to rise about 1.6 percent in 2016 and 2.2 percent in 2017.

Economic Outlook 75

U.S. Forecast

Wells Fargo U.S. Economic Forecast

2013 2014 2015 2016 2017

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Real Gross Domestic Product 1 0.6 3.9 2.0 1.4 0.5 1.4 2.6 2.5 1.5 2.4 2.4 1.6 2.2

Personal Consumption 1.8 3.6 3.0 2.4 1.9 2.8 2.7 2.6 1.7 2.7 3.1 2.6 2.5

Inflation Indicators 2

PCE Deflator 0.2 0.3 0.3 0.5 1.0 0.9 1.1 1.4 1.4 1.4 0.3 1.1 1.9

Consumer Price Index -0.1 0.0 0.1 0.4 1.1 1.1 1.3 1.7 1.5 1.6 0.1 1.3 2.2

Industrial Production 1 -1.9 -2.7 1.5 -3.3 -2.2 -0.8 1.9 2.5 1.9 2.9 0.3 -0.9 2.0

Corporate Profits Before Taxes 2 4.6 0.6 -5.1 -11.5 -3.3 -0.7 1.9 1.9 2.0 1.7 -3.1 -0.1 1.7

Trade Weighted Dollar Index 3 92.1 90.0 92.3 94.5 89.8 88.3 88.3 90.0 75.9 78.4 91.1 89.1 93.7

Unemployment Rate 5.6 5.4 5.2 5.0 4.9 4.9 4.8 4.7 7.4 6.2 5.3 4.8 4.5

Housing Starts 4 0.98 1.16 1.16 1.14 1.13 1.22 1.23 1.24 0.92 1.00 1.11 1.23 1.28

Quarter-End Interest Rates 5

Federal Funds Target Rate 0.25 0.25 0.25 0.50 0.50 0.50 0.75 1.00 0.25 0.25 0.27 0.69 1.38

Conventional Mortgage Rate 3.77 3.98 3.89 3.96 3.69 3.84 3.89 3.95 3.98 4.17 3.85 3.84 4.18

10 Year Note 1.94 2.35 2.06 2.27 1.78 1.89 1.95 2.02 2.35 2.54 2.14 1.91 2.30

Forecast as of: May 11, 20161 Compound Annual Growth Rate Quarter-over-Quarter2 Year-over-Year Percentage Change3 Federal Reserve Major Currency Index, 1973=100 - Quarter End4 Millions of Units5 Annual Numbers Represent Averages

2015 2016

ForecastActualForecastActual

Source: IHS Global Insight and Wells Fargo Securities, LLC

Economic Outlook 76

Wells Fargo International Economic Forecast

(Year-over-Year Percent Change)

GDP CPI

2015 2016 2017 2015 2016 2017

Global (PPP Weights) 3.0% 2.8% 3.1% 2.6% 3.2% 3.5%

Global (Market Exchange Rates) 2.8% 2.5% 2.9% n/a n/a n/a

Advanced Economies1 1.9% 1.7% 2.1% 0.3% 0.8% 1.8%

United States 2.4% 1.6% 2.2% 0.1% 1.3% 2.2%

Eurozone 1.5% 1.7% 2.0% 0.0% 0.2% 1.2%

United Kingdom 2.3% 1.7% 1.9% 0.0% 0.8% 1.5%

Japan 0.5% 0.0% 0.7% 0.8% 0.3% 1.0%

Korea 2.6% 2.6% 2.9% 0.7% 0.9% 1.9%

Canada 1.2% 1.9% 2.4% 1.1% 1.3% 1.9%

Developing Economies1 4.0% 3.8% 4.0% 4.7% 5.5% 5.1%

China 6.9% 6.4% 5.8% 1.4% 2.0% 1.9%

India2 7.2% 7.5% 7.2% 6.0% 4.9% 4.7%

Mexico 2.5% 2.8% 3.1% 2.7% 2.9% 2.8%

Brazil -3.9% -4.0% -0.9% 9.0% 9.0% 7.2%

Russia -3.7% -0.6% 2.1% 15.6% 7.2% 5.9%

Forecast as of: May 11, 20161Aggregated Using PPP Weights 2Forecasts Refer to Fiscal Year

International Forecast

Source: Wells Fargo Securities, LLC

Appendix

Economic Outlook 78

Economic Outlook Group Publications

To view any of our past research please visit:

http://www.wellsfargo.com/ economics

To join any of our research distribution lists please visit: http://www.wellsfargo.com/

economicsemail

A Sampling of Our Recent Special, Regional & Industry Commentary

Selected Recent Economic Reports

Date Title Authors

U.S. Macro

May-02 Hispanics Still Behind the Curve in Education Alemán

April-26 How "Durable" is Rising Core Inflation? Silvia & House

April-26 Recession Risk Remains Elevated: 26 Percent Probability Silvia, Iqbal & Pugliese

April-13 Light at the End of the Tunnel of Oncoming Train? Quinlan, House & Nelson

April-01 Employment Costs: A Bend in the Trend? House & Causey

U.S. Regional

April-21 Charlotte Continues to See Strong Gains Vitner

April-15 Cleveland Retools Its Economy Vitner & Feik

April-15 California Employment Conditions: March 2016 Vitner & Batcheller

April-15 New York Employment Conditions: March 2016 Vitner

April-15 North Carolina Employment Conditions: March 2016 Vitner & Batcheller

Global Econom y

May-02 Taiwanese Economy Essentially Stagnant in Q1 2016 Bryson

April-29 Eurozone GDP Growth Tops Expectations in Q1 Bryson & Nelson

April-29 Mexican Economy Surprises in Q1 2016 Alemán

April-28 Bank of Japan's Latest Surprise: Inaction Quinlan

April-27 U.K. GDP Growth Downshifted in Q1 2016 Bryson

Interest Rates/Credit Market

April-27 An Evolving Interest Rate Framework: The Rise of Uncertainty Silvia

April-20 Breaking Down the Market Model: When Imperfection Rules Silvia

April-13 Net Treasury Issuance: A Longer-Term View Silvia & Brown

April-06 Corporate Interest Coverage Holding Up Despite Weaker Sales Silvia & Nelson

March-30 Households Appear Ready for Higher Rates Silvia & Moehring

Real Estate

April-29 Is the Housing Market Finally Becoming Unstuck? Vitner, Khan & Batcheller

April-29 Residential Investment Provides Boost to Q1 GDP Vitner & Batcheller

April-26 Is the Hotel Cycle Near the End? Khan & Iqbal

April-20 Will U.S. Mortgage Rates Retest Historical Lows? Vitner, Khan & Iqbal

March-31 Housing Chartbook: March 2016 Vitner, Khan & Batcheller

Economic Outlook

Wells Fargo Securities, LLC Economics Group

79

John E. Silvia … ....................... … [email protected]

Global Head of Research and Economics Diane Schumaker-Krieg ………………… ………[email protected]

Global Head of Research & Economics

Chief Economist

Mark Vitner, Senior Economist……………....………. . [email protected]

Jay H. Bryson, Global Economist …………………....…… …[email protected]

Sam Bullard, Senior Economist [email protected]

Nick Bennenbroek, Currency Strategist ……[email protected]

Anika R. Khan, Senior Economist … . [email protected]

Eugenio J. Alemán, Senior Economist… …………[email protected]

Tim Quinlan, Senior Economist …………… ……………. [email protected]

Senior Economists Erik Nelson, Economic Analyst [email protected]

Alex Moehring, Economic Analyst [email protected]

Misa Batcheller, Economic Analyst [email protected]

Michael Pugliese, Economic Analyst [email protected]

Julianne Causey, Economic Analyst [email protected]

Economists

Azhar Iqbal, Econometrician………………… ……………[email protected]

Eric J. Viloria, Currency Strategist [email protected]

Sarah House, Economist …………… ………… [email protected]

Michael A. Brown, Economist ……………… … [email protected]

Economic Analysts

Administrative Assistants

Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2016 Wells Fargo Securities, LLC.

SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

Important Information for Non-U.S. Recipients

For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority’s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only.

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LAWRENCE YUN, PhD


REALTORS®

MARK VITNER



may 2016 economic and commercial real estate outlook

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