bkperspective us mid-year 2019 working 6.19.3pm final · interest rates this year. sources: s&p...

CAPITAL MARKETS

Localized supply issues, butfundamentals strong overall

PROPERTY SECTORS

Financial market swings have left interestrates lower; real estate total returnsdown modestly

ECONOMYU.S. expansion facing heightened risks from global slowdown and trade negotiations

PerspectiveJUNE 2019

UN

ITED

STA

TES

Contents3 Economy

4 Financial Markets

5 Real Estate Investment

6 Apartment

8 Office

10 Retail

12 Industrial

14 Sustainability

Property Metrics

VACANCY / AVAILABILITY

ABSORPTION

NEW SUPPLY

RENT

U.S. PERSPECTIVE | JUNE 2019 2

Bentall Kennedy Research Sentiment

Positive Negative

BENTALL KENNEDY

3U.S. PERSPECTIVE | JUNE 2019BENTALL KENNEDY U.S. PERSPECTIVE | JUNE 2019BENTALL KENNEDY

Reasons for Optimism

• Workers are benefiting from extremely low unemployment and wages are rising.

• Over 2.3 million jobs were created over the past year. Numerous sectors continue to perform well.

• Recent slowdown concentrated in certain sectors, including: retail, manufacturing and government.

• Consumer and small business sentiment remain strong.

• A new North American trade agreement is within reach.

• Inflation is in check and the Fed may move to cut rates, perpetuating the expansion.

Reasons for Pessimism

• Consumption and business investment trending lower.

• The trade war with China continues to simmer.

• The tight labor market – exacerbated by immigration policy and related rhetoric – is limiting growth.

• Inverted yield curve discourages lending and is often a sign of impending recession.

Sources: Bureau of Labor Statistics, U.S. Employment & Training Administration, Moody’s Analytics

3

U.S. ECONOMY

Even with recent slower hiring, labor market reflects a healthy economy

3.6

3.9

4.2

4.5

4.8

5.1

5.4

0

50

100

150

200

250

300

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep

-16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep

-17

Nov

-17

Jan-

18

Mar

-18

May

-18

Jul-1

8

Sep

-18

Nov

-18

Jan-

19

Mar

-19

May

-19

Job Growth

Weekly Unemployment Claims

Unemployment Rate

Job Growth/Unemployment Claims (000s, 3-mo. MA) Unemployment Rate (%, 3-mo. MA)


• As we anticipated, the stock market downturn in late 2018 did not reflect economic fundamentals and was owed to China trade tensions and Fed tightening.

• The market has rebounded in 2019, with the help of more dovish sentiment from the Fed.

• Concern over the trade war with China and potentially with Mexico produced another market dip in May, but stocks have since recovered some of those losses.

• Economic uncertainty, market volatility, and low bond yields globally have helped drive the 10-Year Treasury rate down near its lowest level since September 2017.

• U.S. rates are still relatively high in a global context, with negative yields in Germany and Japan.

• These conditions, coupled with the Fed’s steady rate hikes in 2018 have resulted in an inverted yield curve.

• Both the 3-month Treasury and Fed Funds target rate exceed the 10-Year Treasury yield at the time of this writing in June.

• As previously stated, with key inflation indicators subdued, the bond market is predicting the Fed will cut interest rates this year.

Sources: S&P Dow Jones, Federal Reserve, Bank of Canada, ECB, Bloomberg, Moody’s Analytics

4

U.S. FINANCIAL MARKETS

Stock market swings and yield curve inversion help put Fed back in play

1.9

2.1

2.3

2.5

2.7

2.9

3.1

3.3

3.5

95

100

105

110

115

120

125

130

135

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19

S&P 500 Price Index10-Year Treasury

S&P 500 Price Index (YE 2016=100)* 10-Yr. Treasury Rate (%)*

-0.50.00.51.01.52.02.53.0

Germany Japan France Spain UnitedKingdom

Canada UnitedStates

Italy Greece

Select Global 10-Yr. Treasury Rates (%, as of 5/31/19)

* Data are smoothed using a five-day moving-average


• Sales volume remains strong with activity in the four major property sectors rising 12.3% from YE 18Q1 to YE 19Q1. This gain was largely owed to a strong second half of 2018.

• Activity rose in both major and non-major markets and was also up in each of the four major property types.

• Fewer major portfolio and entity transactions occurred in early 2019 compared to the start of 2018.

• Generally, valuations are on the rise, but at a somewhat slower pace than a year ago.

• Investment returns as reported by NCREIF show only a minor deterioration over the past year versus the previous two years.

• This comes despite a dip in retail returns as property values in the sector fell over the past four quarters.

• Industrial returns have been on an upward trend, aided by both strong fundamentals and investor demand.

• With interest rates remaining low, investment activity and property investment returns should be relatively healthy over the next year.

Sources: Real Capital Analytics, NCREIF

5

U.S. REAL ESTATE INVESTMENT

Relatively attractive yields and strong fundamentals keep capital flowing

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

Apartment Office Retail Industrial

2005-07 Avg.

2014-16 Avg.

YE 2017Q1YE 2018Q1

YE 2019Q1

Annual Transaction Volume (billions)

0%

3%

6%

9%

12%

15%

Overall Apartment Office Retail Industrial

NCREIF Property Index Total Returns (year-ending Q1 of each year)

2015 2016 2017 2018 2019

6U.S. PERSPECTIVE | JUNE 2019BENTALL KENNEDY 6

Vacancy

4.8%Vacancy

Past 13 Quarter Trend

10-Yr. Average:5.5%

§ Vacancy rose in the first quarter of 2019, but tightened modestly over the past year.

§ Vacancy remains significantly below its historical average and the four-quarter moving average is at its lowest level since 2001.

§ Certain markets will face upward pressure from accelerating supply.

Sources: Axiometrics, Bentall Kennedy

Absorption

299KUnits

Past 13 Quarter Net Absorption

10-Yr. Annual Average:236K Units

§ Net absorption weakened slightly over the past year but continued to surpass historical trends.

§ The U.S. homeownership rate fell in the first quarter, as single-family home sales and construction slowed.

§ Solid demand growth prospects are supported by a healthy labor market, higher homeownership costs and changing lifestyle preferences.

New Supply

301K Units

Past 13 Quarter Net Completions

10-Yr. Annual Average:221K Units

§ Supply growth moderated over the past year and multifamily permitting suggests that it has peaked for this cycle.

§ While supply growth is leveling out nationally, it is expected to pick up in a number of Sunbelt and tech markets.

Rent

3.3%YOY Growth

Past 13 Quarter YOY Rent Growth

10-Yr. Annual Average:2.7%

§ Low vacancy and rising wages—particularly among the younger age cohort—have supported an acceleration in rent growth.

§ Elevated supply and affordability constraints will cap growth potential in select markets.

§ Sunbelt markets experienced the strongest rent gains, but increased development activity weighs on the outlook for these metros.

As of 19Q1 4-Qtrs. Ending 19Q1 4-Qtrs. Ending 19Q1 YOY as of 19Q1

U.S. APARTMENT

Fundamentals strong even as supply remains elevated

4%

5%

6%

16 17 18 19-10

30

70

110

150

16 17 18 19

Thou

sand

s

-10

30

70

110

150

16 17 18 19

Thou

sand

s

2%

3%

4%

5%

16 17 18 19


• Declining affordability within the for-sale housing market has supported apartment demand.

• For-sale housing inventory remains tight compared to history, which has pushed the U.S. median home price well above its prerecession level.

• At the same time, mortgage rates rose throughout 2018.

• As a result, housing sales slowed considerably year-over-year and homeownership fell in the first quarter of 2019.

• Mortgage rates are trending lower again in 2019, but high prices remain an obstacle for many would-be homebuyers.

• Affordability constraints—along with changing lifestyle preferences and rising consumer debt—should keep homeownership rates relatively low.

Sources: Axiometrics, National Association of Realtors (NAR), Moody's Analytics

7

U.S. APARTMENT

For-sale housing market trends remain supportive of apartment demand

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Apartment Demand Growth (Y/Y)Change in Housing Affordability Index (Y/Y)

Housing Affordability Index

Apartment Demand


Vacancy

12.5%Vacancy


10-Yr. Average:14.5%

§ Vacancy declined by 50 basis points over the past year, approaching its prerecession low.

§ Declines were strongest in key tech markets with tight vacancies and robust demand growth, such as San Francisco, San Jose and Denver.

§ Vacancy is expected to rise steadily as net completions pick up over the next year.

Sources: CBRE-EA, Bentall Kennedy

Absorption

64Million SF


10-Yr. Annual Average:32.7 MSF

§ Net absorption gained momentum driven by stronger office-using job growth.

§ Office leasing was dominated by tech-related firms along with life sciences and coworking tenants.

§ Labor constraints temper demand growth prospects in the year ahead.

New Supply

49Million SF



§ Annual net completions remained stable in the first quarter, but supply growth is expected to pick up.

§ Office construction activity accelerated recently, with the strongest levels in high-growth Sunbelt and tech markets.

§ However, development activity remains well below levels of previous economic expansions.

Rent

3.2%YOY growth



§ Annual rent growth accelerated to nearly double its year-ago pace.

§ Tech markets, including the Bay Area, Austin and Raleigh, have surged back to the top in terms of rent growth.

§ Rent growth prospects will likely be restrained by a continued rise in construction activity.


U.S. OFFICE

Rent growth has accelerated, but labor constraints and supply cloud the outlook

12.0%

12.5%

13.0%

16 17 18 190

10

20

16 17 18 19

Thou

sand

s

0

10

20

16 17 18 19

Thou

sand

s

0.0%1.0%2.0%3.0%4.0%5.0%

16 17 18 19


• National office development activity is steadily accelerating, with the strongest construction rates in high-growth Sunbelt and tech markets—led by Austin, Charlotte, San Jose and Seattle.

• Over half of the total space underway among listed major office markets is preleased, but rates vary widely by metro.

• San Francisco and San Jose boast preleasing rates of 75% or more driven by major tech expansions, such as those by Uber, Facebook and Google.

• Unleased space makes up a significant share of construction in Charlotte, Austin, Seattle and Miami—which could negatively impact fundamentals in these markets.

• The New York metro’s supply growth rate is similar to the national average, but development is dominated by speculative activity in Midtown Manhattan—which presents downside risk to key submarkets.

Source: CBRE-EA

9

U.S. OFFICE

Construction moderate nationally but risks rising in certain Sunbelt and tech markets

0

2

4

6

8

10

12

14

16

18

20

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Aus

tinC

harlo

tteS

an J

ose

Sea

ttle

San

Fra

ncis

coM

iam

iW

ashi

ngto

n, D

CN

ew Y

ork

Mar

ket A

vera

geD

alla

s-Ft

. Wor

thB

osto

nC

hica

goA

tlant

aD

enve

rO

akla

ndP

hoen

ixLo

s A

ngel

esR

alei

ghB

altim

ore

San

Die

goP

hila

delp

hia

Hou

ston

Pitt

sbur

ghO

rang

e C

ount

yM

inne

apol

is

Under Construction (SF)

Milli

ons

UC as % of Stock - Leased UC as % of Stock - Unleased Total Space Underway (SF)

Under Construction (% of Stock)


Availability

8.8%Availability



§ Retail availability has fluctuated over the past two years, but fell in 2019Q1 to its lowest level since 2007.

§ Improvements in retail fundamentals will be aided by the repurposing of existing obsolete stock.

§ A recession would likely have an outsized effect on retail availability relative to other property types.


Absorption

24Million SF



§ Demand growth has been muted throughout this economic cycle as many retailers have shifted sales strategies and reduced store sizes.

§ More store closures have been announced in the first five months of 2019 than in all of 2018, outpacing openings.

§ Brick and mortar retail still plays a key role in most retailers’ strategies and many online-first companies have begun opening stores.

New Supply

10Million SF



§ Less retail space was delivered over the past four quarters than at any point in CBRE-EA’s history, dating back to 1980.

§ High population growth metros will see the lion’s share of retail development as these are the metro areas where single-family home development persists.

§ Retail development in mature metros will be focused on destination retail and mixed-use projects.

Rent

2.2%YOY Growth


10-Yr. Annual Average:-0.3%

§ Rent growth slowed year-over-year but will likely continue at or near an inflationary pace.

§ Rent trends are divergent among high and low quality centers. High visibility, high foot traffic centers remain sought-after.

Note: Retail data reflect neighborhood and community centers only


U.S. RETAIL

Economic growth bringing benefits, but shrinking tenant footprints and bankruptcies remain headwinds

8%

10%

12%

16 17 18 19-5

10

25

16 17 18 19

Thou

sand

s

-5

10

25

16 17 18 19

Thou

sand

s

0%

3%

6%

16 17 18 19


• Retailers across segments saw annual sales growth cool in the first quarter of 2019.

• Headline growth slowed to 3.6%, while brick and mortar sales expanded at a much more tepid 2.4%.

• Ecommerce sales growth slowed as well, to 12.4%, down from its 5-year average annual growth rate of 14.4%.

• Strong performance in the bars & restaurants and health & personal care sectors has supported brick and mortar demand.

• Home furnishings outperformed earlier this cycle, but recent growth has slowed along with home sales and increased ecommerce competition.

• Commoditized industries, like electronics, toys, sporting goods, and hobbies continue to suffer. General merchandisers have benefitted from bankruptcies in these segments.

Source: U.S. Census Bureau

11

U.S. RETAIL

Retail sector sales trends reveal winners and losers

-10%

-5%

0%

5%

10%

15%

20%

Reta

il & Fo

od S

vcs (

Ex: V

ehicl

es, P

arts a

nd G

as)

Reta

il & Fo

od S

vcs (

Ex: E

comm

erce

, Veh

icles

, Par

ts an

d Gas

)

Ecom

merce

: All C

atego

ries

Healt

h and

Pers

onal

Care

Bars

and

Resta

urants

Build

ing M

ateri

als an

d Gar

den

Groc

ery a

nd B

ever

age

Gene

ral M

erch

andis

e

Cloth

ing

Hom

e Fur

nishin

gs

Gas S

tation

s

Elec

tronic

s

Misc

ellan

eous

Reta

ilers

Spor

ting

Good

s, Ho

bbies

, Boo

ks an

d Mus

ic

Sales Growth (YoY; 2019Q1)

5-Yr. Average Annual Growth


Availability

7.1%Availability



§ National availability increased in 19Q1 for the first time in 37 quarters.

§ Availability may rise further due to strong supply growth.

§ The national market should remain very tight relative to historical trends for the foreseeable future.


Absorption

232Million SF



§ Absorption softened in the most recent quarter, but demand growth has been robust over the past year.

§ Uncertainty created by trade disputes with key partners could continue to suppress near-term demand growth.

§ If economic uncertainty erodes consumer confidence, retail sales, and by extension industrial demand, may suffer.

New Supply

213Million SF



§ Supply growth was similar in each of the past two years; both totals were the strongest of the current cycle.

§ Recent completions have been roughly in line with the peak of the prior cycle (2006), despite tighter fundamentals.

§ According to CBRE-EA, supply growth is set to accelerate by nearly 15% over the next four quarters.

Rent

4.1%YOY growth



§ Rent growth has moderated from prior outsized rates, but remains the strongest of the four major property sectors.

§ Rent growth is expected to continue, but is unlikely to accelerate.

§ Most markets are clustered between 0%-5% but several outliers, including Philadelphia and Orange County, are seeing more dramatic growth.


U.S. INDUSTRIAL

A number of factors held back demand growth in 2019Q1

6%

8%

10%

16 17 18 190

75

150

16 17 18 190

75

150

16 17 18 19

Thou

sand

s

3%

5%

7%

16 17 18 19


• Availability is near its historical low. In the unlikely event that demand growth shuts down over the next year for economic reasons, and net absorption over the next four quarters is zero, national availability would remain below its 20-year average.

• If supply continued to grow at current rates in the absence of any demand growth, national availability would not eclipse its long term average until mid-2021.

• Many major US industrial markets are positioned to remain tighter than they have been historically as they benefit from growth in ecommerce. Tight conditions should allow them to weather this downside scenario.

• Markets such as New York, Detroit, San Jose, Boston, and Atlanta each have several years of runway before availabilities return to historical levels, even if demand were to shut down.

• A few markets are delivering enough supply currently to impact fundamentals in the short term. Dallas-Fort Worth, Houston, and Baltimore are among the metros at greatest risk of eclipsing their long term average rates in this downside scenario.


13

U.S. INDUSTRIAL

Stress testing industrial markets: Most markets should remain structurally tighter

2%

4%

6%

8%

10%

12%

14%

16%

Los

Ange

les

Ora

nge

Coun

tyN

ew Y

ork

San

Fran

cisc

oIn

dian

apol

isSe

attle

Det

roit

New

ark

Oak

land

San

Jose

Mia

mi

Phila

delp

hia

Uni

ted

Stat

esFo

rt La

uder

dale

Den

ver

Rive

rsid

eBo

ston

Chi

cago

Was

hing

ton,

DC

Atla

nta

Fort

Wor

thH

oust

onAu

stin

Dal

las

Balti

mor

e

Availability

CurrentLong Term AverageNext Year - (Demand Shutdown)


SPOTLIGHT

Sustainability

As Co-Chair of the UNEP Fl Property Working Group and a member of the Investment Committee, we advance a global mandate to drive adoption of sustainability in real estate investment and property management.

In 2018-2019, Bentall Kennedy, UNEP Fl and the Real Property Association of Canada (REALPAC) conducted an ESG survey of global real estate investors and fund/asset managers representing over $1 trillion USD of assets under management. This survey was one of the largest ever conducted of its kind, and it revealed a near consensus view on the importance of weighing ESG criteria in real estate investment decision-making.

Global ESG Real Estate Investment Study

90%plan to further analyze ESG criteria over

the next 12 months_____________________

93%of investors, including fund and asset managers, include

ESG criteria in real estate investment decisions_____________________

85%are highly or very highly motivated to use

ESG criteria to lower risk_____________________

83%have experienced an increase in investor demand

for sustainability disclosure

Download the Global ESG Real Estate Investment Survey report here

https://www.unepfi.org/wordpress/wp-content/uploads/2019/03/Global-ESG-Real-Estate-Investment-Survey-Results.pdf

15U.S. PERSPECTIVE | JUNE 2019BENTALL KENNEDY

http://www.bentallkennedy.com/

mailto:[email protected]?subject=More%20Information%20About%20Perspective

bkperspective us mid-year 2019 working 6.19.3pm final · interest rates this year. sources: s&p...

Documents