multifamily and commercial real estate investment trends

Multifamily and Commercial Real Estate Investment Trends Q2 2013 Quarter in Review

With Supporting Data and Analysis by

2

Material in this report is © 2013 Chandan Economics LLC or Century 21 Real Estate LLC, except where indicated. CENTURY 21® Is a registered trademark owned by Century 21 Real Estate LLC. An Equal Opportunity Company. Equal Housing Opportunity. Each CENTURY 21 Office is Independently Owned and Operated.

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

2005 2006 2007 2008 2009 2010 2011 2012 2013 (A)

Commercial Real Estate Investment

Commercial real estate investment activity in 2013 is on track to surpass last year’s level. Fueling the improvement, the balance of transaction volume is shifting. As prices trend higher and higher for the largest properties, private investor interest in small- and mid-cap assets and value-add properties has increased.

Multifamily & Commercial Property Sales Volume; In $ Billions 2013 is H1’13 Annualized Volume

Source: Chandan

+270% +37%

2013 Projection

Range

3


$0

$20

$40

$60

$80

$100

$120

$140

$160

2005 2006 2007 2008 2009 2010 2011 2012 2013

Investment Back on Track •  Investment sales spiked in late 2012 as investors worked to dispose of properties before possible changes in the tax treatment of their gains. The acceleration of sales in the final quarter depleted the pipeline of new deals, resulting in a sharp drop in Q1 2013 trades.

•  Investment activity in the Q2 2013 returned to its previous pattern of sustained improvement. Sales surpassing $80 billion reflect the third most-active quarter since late 2007.

Multifamily & Commercial Property Sales Volume In $ Billions

Source: Chandan

4


$0

$20

$40

$60

$80

$100

$120

2008 2009 2010 2011 2012 2013

Investment Back on Track •  As compared to a year

earlier, commercial property sales in Q2 2013 increased by 34%.

•  Behind the market’s underlying trend, sales of mid-cap properties in secondary markets are emerging as more important contributors to overall investment activity.

•  Investors in these markets are benefitting from improved access to bank and CMBS conduit lending.

Multifamily & Commercial Property Sales Volume In $ Billions

Source: Chandan

+34%

5


Lending Conditions

•  Sales of small and mid-cap properties depend on the availability of financing. Across every core property type, an overwhelming majority of lenders expect to continue ramping up activity.

Apartment Office

Retail Industrial

YES NO

YES NO

YES NO

YES NO

RELA-Chandan Survey of CRE Lender Sentiment Over the next twelve months, I expect my institution will increase the dollar volume of its loan commitments.

6


88

90

92

94

96

98

100

102

2007 2008 2009 2010 2011 2012 2013

Employment Trends

Macroeconomic Trends

P6

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015

US Real GDP Change, Annual and Forecast

Index=100 at January 2007; Source: Chandan, BLS

Supporting commercial real estate trends, the economic outlook has improved in spite of weak GDP results during Q! and Q2 2013.

Forecast

7


Apartment Mid- and High-Rise, Garden

8


1%

2%

3%

4%

5%

6%

7%

8%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Apartment Cap Rates & Spreads •  Cap rates on apartment property sales, which are lower than for any other property type, showed signs of leveling in the second quarter.

•  Better access to financing and the income strength of the apartment sector over the last few years are driving investors’ favorable view of the asset class. Buyers should evaluate prices carefully in late 2013 as indications of slower rent growth are emerging in markets with significant construction.

Source: Chandan

Multifamily Cap Rates and Spreads Over 10-Year Treasury Yield

Cap Rate

Spread Over Treasury

9


$0

$5

$10

$15

$20

$25

$30

$35

2005 2006 2007 2008 2009 2010 2011 2012 2013

Apartment Sales Volume

•  The volume of apartment property sales dipped in the second quarter.

•  Investors have not turned their back on the sector by any means. At the top end of the market, where prices exceed their pre-recession levels, investors are proceeding cautiously.

Source: Chandan

In $ Billions

10


$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

$60

2005 2006 2007 2008 2009 2010 2011 2012 2013

Multifamily Construction Spending •  Multifamily construction spending, which includes both rental apartments and condos, is recovering at a moderate pace.

•  The turnaround in housing will see more condo projects get underway in late 2013 and 2014, pushing spending and employment higher in the construction industry.

Source: Commerce, Chandan

In $ Billions

11


Apartment Vacancy Rate

•  The apartment vacancy rate inched up in the second quarter but remains near its lowest level on record.

•  Rental demand remains exceptionally strong. The increase in the vacancy rate is attributable to new properties in the market and some rebalancing to home purchases. New supply will push vacancy rates higher in late 2013, slowing rent growth. Source: Chandan

3%

4%

5%

6%

7%

8%

9%

10%

2005 2006 2007 2008 2009 2010 2011 2012 2013

12


Homeownership Rate •  An improving housing

market has not stopped new households from moving into apartments in record numbers. The homeownership rate is now at its lowest level since 1995.

•  The decline in homeownership will start to level off as the housing recovery gains additional momentum, but rental demand will remain strong as compared to long-term norms. Source: Census, Chandan

61%

62%

63%

64%

65%

66%

67%

68%

69%

70%

1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

13


Industrial Warehouse, Distribution, R&D/Flex

14


2%

3%

4%

5%

6%

7%

8%

9%

10%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Industrial Cap Rates & Spreads •  Industrial cap rates

increased slightly in the second quarter, responding to the abrupt rise in benchmark Treasury rates.

•  Investment demand is strongest for modern distribution facilities along major supply chains and logistics channels, including deep water ports.

•  Older, obsolete properties are still struggling to attract buyers and will see cap rates move higher as interest rates go up. Source: Chandan

Industrial Cap Rates and Spreads Over 10-Year Treasury Yield

Cap Rate


15


$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

2005 2006 2007 2008 2009 2010 2011 2012 2013

Industrial Property Sales Volume

•  Following a surge in late 2012, industrial property sales recovered in the second quarter. A rebound from the first quarter slump, sales reached their third-highest level since before the recession.

•  Investor interest in the sector is strengthening as the outlook for economic activity and domestic and international trade improves. Source: Chandan

In $ Billions

16


$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

2005 2006 2007 2008 2009 2010 2011 2012 2013

Industrial Construction Spending

•  As compared to pre-recession activity, industrial property construction is still very low. In particular, financing remains a challenge for small-scale multi-tenant projects.

•  Apart from a small number of speculative construction projects, build-to-suit projects still dominate industrial development activity.


In $ Billions

17


Industrial Vacancy Rate

•  Industrial property vacancy rates declined in the second quarter but are still well above their pre-recession lows.

•  Newer properties located near deep-water ports are some of the best performers, along with distribution centers on ecommerce supply channels.

Source: Chandan

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

2005 2006 2007 2008 2009 2010 2011 2012 2013

18


Durable Goods Orders •  One measure of trade

in support of industrial warehouse demand, the value of durable goods orders has now passed it pre-recession peak.

•  As businesses grow more confident in the economic outlook, orders and inventories will strengthen, contributing further to space demand.


In $ Billions

$100

$120

$140

$160

$180

$200

$220

$240

$260

2005 2006 2007 2008 2009 2010 2011 2012 2013

19


Combined Import & Export of Goods •  International trade

recovered quickly after the recession but has been leveling off in recent quarters. Volatility in commodity prices and economic uncertainty in Europe and Asia Pacific are drags on activity.

•  A potential threat to West Coast ports, ports along the East Coast are making sizeable investments ahead of the Panama Canal expansion, hoping to capture traffic that now docks on the Pacific.


In $ Billions

$60

$70

$80

$90

$100

$110

$120

$130

$140

2005 2006 2007 2008 2009 2010 2011 2012 2013

20


Office CBD & Suburban

21


2%

3%

4%

5%

6%

7%

8%

9%

10%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Office Cap Rates & Spreads •  Investors pushed cap rate

on second-quarter office property sales to their lowest level in more than five years

•  High-rise buildings in the top central business districts, including New York, San Francisco, and Washington, DC, account for the most aggressive trading.

•  Cap rates are falling more slowly on suburban properties, where vacancy rates are recovering weakly.

Source: Chandan

Office Cap Rates and Spreads Over 10-Year Treasury Yield

Cap Rate


22


2%

3%

4%

5%

6%

7%

8%

9%

10%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Office Cap Rates by Property Class •  Across all markets, the

gap between cap rates on Class A and Class B/C office properties narrowed in the second quarter but remains wide by historic standards.

•  Investors are looking more seriously at Class B/C assets as competition for core properties grows stronger and the economy improves. Source: Chandan

Cap Rates by Class Cut

Class B/C

Class A

23


$0

$10

$20

$30

$40

$50

$60

$70

$80

2005 2006 2007 2008 2009 2010 2011 2012 2013

Office Sales Volume •  Office property sales

improved in the second quarter, following the early 2013 slump.

•  As compared to investment activity before the financial crisis, which ballooned amid a frenzy of trophy property sales, activity remains subdued.

Source: Chandan

In $ Billions

24


$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

$60

2005 2006 2007 2008 2009 2010 2011 2012 2013

Office Construction Spending •  Office construction

spending has improved only slightly from its recession low. During the second quarter, some measures of spending declined.

•  The trend will shift in late 2013 as major projects in New York City and other large markets progress or get underway.

•  Activity is more limited in secondary markets and for value-add projects.


In $ Billions

25


25.5

26.0

26.5

27.0

27.5

28.0

28.5

29.0

29.5

30.0

2005 2006 2007 2008 2009 2010 2011 2012 2013

Professional and Office-Using Employment

•  Job creation in professional and business services continues to outpace financial services, where office-using employment has improved only slightly since the recession.

•  Overall demand for office space is increasing at a slower rate than its related employment categories, in part reflecting changing office space-use patterns.

Source: Bureau of Labor Statistics, Chandan

In Millions

26


Office Vacancy Rate •  The office vacancy rate

declined in the second quarter but remains well above its pre-recession level of 11 percent.

•  Many businesses are increasing space at a slower pace than during previous recoveries, even if they are ramping up hiring.

•  Technology’s impact on the relationship between employment and office space-demand is becoming increasingly relevant for the sector. Source: Chandan

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

2005 2006 2007 2008 2009 2010 2011 2012 2013

27


Retail Neighborhood & Community Shopping Centers, Regional & Super Regional Malls

28


1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Retail Cap Rates & Spreads •  Cap rates on retail property sales declined only slightly in the second quarter, reflecting limited competition for small neighborhood and community shopping centers.

•  Net lease retail properties, including some restaurant and bank branch locations, are registering the lowest cap rates of any asset class. Source: Chandan

Retail Cap Rates and Spreads Over 10-Year Treasury Yield

Cap Rate


29


Retail Property Sales Volume •  Even though pricing

trends remain weak, retail property sales recovered strongly in the second quarter, rising to their second-highest level since before the recession.

•  The availability of financing through CMBS conduit lenders is a boost for investors in the sector who have struggled to obtain mortgages through regional and community banks. Source: Chandan

In $ Billions

$0

$5

$10

$15

$20

$25

$30

2005 2006 2007 2008 2009 2010 2011 2012 2013

30


$0

$5

$10

$15

$20

$25

$30

$35

2005 2006 2007 2008 2009 2010 2011 2012 2013

Retail Construction Spending •  Retail development

activity is increasing at a very slow pace. Some large scale mall and mixed-use projects are underway, but big box retail and strip malls have seen little new activity.

•  Small retail property construction is heavily dependent on bank lending. Many banks remain hesitant to support these projects. Source: Commerce, Chandan

In $ Billions

Malls

Shopping Centers

31


Retail Vacancy Rate •  Retail vacancy rates

declined slightly in the second quarter but remain near their recession highs.

•  Vacancy rates are flat (and sometimes increasing) for non-anchored strip malls and neighborhood and community shopping centers.

•  Grocery-anchored shopping centers are more stable. Much larger regional malls have also seen occupancy return to pre-recession levels.

Source: Chandan

4%

6%

8%

10%

12%

14%

16%

2005 2006 2007 2008 2009 2010 2011 2012 2013

32


$300

$320

$340

$360

$380

$400

$420

$440

2005 2006 2007 2008 2009 2010 2011 2012 2013

Retail Spending •  Consumer spending on

retail goods and services has far surpassed its pre-recession peak.

•  Although wage and salary growth has been slow, rising home values are supporting consumer spending through “wealth effects”

•  Not all retailers are seeing improvements. In areas such as books and general electronics, the shift to online sales has been devastating for bricks and mortar sales channels.


In $ Billions Consumer Spending on Retail Goods, Excluding Automobiles

33


-15%

-10%

-5%

0%

5%

10%

15%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Retail Spending

•  Retail spending is rising at a year-over-year pace of roughly 5 percent, down from a peak rebound rate of nearly 10 percent in 2011.

•  The continued improvement in consumer spending trends depends critically on the jobs outlook. Although housing has lifted consumer sentiment, lower savings rates are not a long-term source of growth in discretionary income.


Change in Consumer Spending on Retail Goods, Excluding Automobiles

34


13.6

13.8

14.0

14.2

14.4

14.6

14.8

15.0

15.2

15.4

15.6

15.8

2005 2006 2007 2008 2009 2010 2011 2012 2013

Retail Employment •  Even though spending

has more than recovered, retail employment is below its pre-recession level.

•  In some tourist-driven and high density markets, retail employment is rising much faster than the national trend. In these top retail corridors, occupancy rates and investment trends are also much stronger.

Source: Bureau of Labor Statistics, Chandan

In Millions

35


Retail Spending on the Internet

•  Internet-based retail sales account for an increasing share of all retail spending and are a persistent challenge for the bricks and mortar segment.

•  Legislation is progressing that will impose a consistent sales tax on Internet purchases, but that will not reverse the general momentum. Prospects are brightest for traditional retailers that are developing complementary online platforms. Source: Commerce, Chandan

Change From One Year Earlier

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2005 2006 2007 2008 2009 2010 2011 2012

36


Data Sources Chandan Economics tracks financing of multifamily and commercial real estate properties through primary data collection of mortgages originated by banks, life companies, conduit (CMBS) lenders, agency lenders, and private lenders. Mortgages in support refinancing and property sales are both captured in the data collection process. Estimates of commercial property sales volume are based on the volume of loans originated in support of property sales and estimates of all-cash property sales volume. Property fundamentals trends, including vacancy rates, are based on the performance of leveraged properties. Disclaimer Neither Chandan Economics, its employees, agents, successors, and/or assigns, make any warranties, express or implied, including the warranties of merchantability or fitness for a particular purpose, or assume any legal liability or responsibility for the accuracy and completeness, or usefulness of any information contained in this report or represent that use of this information would not infringe other third party rights. Further, Chandan Economics shall not be liable for any direct, indirect, consequential, or inconsequential damages to the user, or a third party arising from use of the information contained herein. In providing this information, Chandan Economics does not assume any liability as a result of the use or misuse of the information. By your use of this information, you recognize and agree to hold Chandan Economics harmless from any liability as of your using this information, materials, products or services.

multifamily and commercial real estate investment trends

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