Current Trends in Commercial Real Estate - Is it Reaching a Peak?

1

Jeff Fisher, Ph.D. (OSU) President, Homer Hoyt Institute

Consultant, NCREIF Visiting Professor, Johns Hopkins Univ.

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Annualized Returns for past 10 years

Private Institutional Commercial Real Estate

Publicly Traded REITs Stocks

Leveraged Private Real Estate Outperformed REITs and Stocks

Returns from 1979 through 2015

3

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Real Estate Returns 4 quarter moving average

Tech Bust & 9-11

NCREIF Property Index (Unleveraged)

Strong Double Digit Returns the Past 5 years since Recovery

Recession

Great Recession

?

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-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Real Estate Returns Columbus vs. Nation 4 quarter moving average

Nation Columbus

Columbus CBSA Followed National Trends

NPI Leveraged Property Analysis Leveraged and Unleveraged Annual Total Returns

5

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%19

844

1985

419

864

1987

419

884

1989

419

904

1991

419

924

1993

419

944

1995

419

964

1997

419

984

1999

420

004

2001

420

024

2003

420

044

2005

420

064

2007

420

084

2009

420

104

2011

420

124

2013

420

144

2015

4

Leveraged Unleveraged Implied Interest Rate

Leverage has been favorable due to low interest rates.

Loan-to-Value for Institutional Real Estate

6

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%19

834

1984

419

854

1986

419

874

1988

419

894

1990

419

914

1992

419

934

1994

419

954

1996

419

974

1998

419

994

2000

420

014

2002

420

034

2004

420

054

2006

420

074

2008

420

094

2010

420

114

2012

420

134

2014

420

154

LTV

Loan-to-Value (4QMA)

LTV relatively conservative for institutional investors

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Price Level

CRE Slightly above Long-term Trend Line and Pre-Recession Peak

Real Estate Fund Contributions and Distributions 4Q Rolling Total as of December 31, 2015

-$5.0

-$3.0

-$1.0

$1.0

$3.0

$5.0

$7.0

$9.0

$11.0

$13.0

$15.0

4Q 2

000

2Q 2

001

4Q 2

001

2Q 2

002

4Q 2

002

2Q 2

003

4Q 2

003

2Q 2

004

4Q 2

004

2Q 2

005

4Q 2

005

2Q 2

006

4Q 2

006

2Q 2

007

4Q 2

007

2Q 2

008

4Q 2

008

2Q 2

009

4Q 2

009

2Q 2

010

4Q 2

010

2Q 2

011

4Q 2

011

2Q 2

012

4Q 2

012

2Q 2

013

4Q 2

013

2Q 2

014

4Q 2

014

2Q 2

015

4Q 2

015

ODC

E N

et F

und

Flow

s ($B

il)

Contributions Distributions/Redemptions

8

Lots of capital

Q4’15 VOLUME HIT THE SAME RANGE AS 06’Q4 AND 07’Q1

US Quarterly Volume & Pricing

*Moody’s/RCA CPPI, national aggregate, December 2000 = 100

0

25

50

75

100

125

150

175

200

225

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

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

Billio

nsIndividual Portfolio Entity CRE Prices*

BUT US DEAL VOLUME TAKING A SPRING BREAK

$0

$10

$20

$30

$40

$50

$60

$70

$80

'12 '13 '14 '15 '16

billions

Individual Portfolio Entity

RECORD CROSS-BORDER INFLOWS INTO US

US Direct Acquisitions by Foreign Buyers

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Canada Europe Middle EastAsia Australia Latin America

billions

2015 DEAL VOLUME (EXCLUDING DEVELOPMENT SITES) Market 2015 Sales Volume ($M) YOY Change

NYC Metro 80,044,632,743$ 38%London Metro 57,048,259,816$ 29%

LA Metro 36,339,822,609$ 26%Tokyo 32,816,064,247$ -20%

SF Metro 32,020,330,907$ 20%Paris 26,904,007,887$ 6%

DC Metro 22,414,661,294$ 55%Chicago 19,882,374,086$ 48%Dallas 17,389,340,121$ 32%Atlanta 15,627,363,537$ 27%Boston 15,575,697,241$ 20%

Shanghai 15,417,451,167$ 89%So Fla 14,247,585,997$ 33%Seattle 13,119,322,368$ 75%

Berlin-Brandenburg 12,394,817,287$ 43%Sydney 11,828,131,295$ -17%

Hong Kong 11,753,773,415$ -13%Phoenix 10,778,911,771$ 65%

Rhine-Ruhr 10,377,724,647$ 13%Houston 10,357,447,520$ 6%

Melbourne 9,991,364,611$ 2%Amsterdam/Randstad 9,309,099,496$ 49%

Denver 9,285,305,639$ 26%Frankfurt/Rhine-Main 9,156,980,868$ 9%

San Diego 8,264,584,392$ 49%Germany other 8,216,226,670$ -30%

Toronto 7,303,806,133$ 13%Austin 7,222,948,013$ 15%

Sweden other 6,968,369,643$ 3%Philly Metro 6,612,718,297$ 11%

$80,045$57,048

$36,340$32,816$32,020

$26,904$22,415

$19,882$17,389

$15,627$15,576$15,417$14,248$13,119$12,395$11,828$11,754$10,779$10,378$10,357$9,991$9,309$9,285$9,157$8,265$8,216$7,304$7,223$6,968$6,613

38%29%26%

-20%20%

6%55%48%

32%27%20%

89%33%

75%43%

-17%-13%

65%13%6%2%

49%26%

9%49%

-30%13%15%

3%11%

US has 7 of Top 10 Cities Worldwide for Deal Volume

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Canada Europe Middle EastAsia Australia Latin America

billions

Cross-Border Acquisitions of US Apartments

Foreign Buyers a Potential Structural Shift Lots of interest in apartments – perhaps late to the game.

Total NPI Returns by Property Type Annual Returns Over Last Five Years

14

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

4Q 2011 4Q 2012 4Q 2013 4Q 2014 4Q 2015

Apartment Hotel Industrial Office Retail

Apartments best returns coming out of recession

Industrial has taken the lead in returns.

NPI Annual Rental Income Growth by Property Type

15

7.0%

4.8%

5.7%

1.4%

3.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Apartment Hotel Industrial Office Retail

Period Ending Fourth Quarter 2015 Although apartments still experiencing strong rent growth. May have been already been anticipated in returns.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1Q 2

015

2Q 2

015

3Q 2

015

4Q 2

015

2015 Year-End Summary: Space Market Observations

16

Cash Flow Growth (4QMA) Rental Income Growth (4Q Rolling)

Quarterly Occupancy Rate NOI Growth (4Q Rolling)

90.0%

90.5%

91.0%

91.5%

92.0%

92.5%

93.0%

93.5%

1Q 2

015

2Q 2

015

3Q 2

015

4Q 2

015

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

1Q 2

015

2Q 2

015

3Q 2

015

4Q 2

015

3.0%

3.5%

4.0%

4.5%

5.0%

1Q 2

015

2Q 2

015

3Q 2

015

4Q 2

015

Fundamentals still good

NPI Rental Income Growth

17

-4%

-2%

0%

2%

4%

6%

8%

2001

Q2

2001

Q4

2002

Q2

2002

Q4

2003

Q2

2003

Q4

2004

Q2

2004

Q4

2005

Q2

2005

Q4

2006

Q2

2006

Q4

2007

Q2

2007

Q4

2008

Q2

2008

Q4

2009

Q2

2009

Q4

2010

Q2

2010

Q4

2011

Q2

2011

Q4

2012

Q2

2012

Q4

2013

Q2

2013

Q4

2014

Q2

2014

Q4

2015

Q2

2015

Q4

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-4%

-2%

0%

2%

4%

6%

8%

2001

Q2

2001

Q4

2002

Q2

2002

Q4

2003

Q2

2003

Q4

2004

Q2

2004

Q4

2005

Q2

2005

Q4

2006

Q2

2006

Q4

2007

Q2

2007

Q4

2008

Q2

2008

Q4

2009

Q2

2009

Q4

2010

Q2

2010

Q4

2011

Q2

2011

Q4

2012

Q2

2012

Q4

2013

Q2

2013

Q4

2014

Q2

2014

Q4

2015

Q2

2015

Q4

NPI

(rol

ling

4Q)

Rent

Gro

wth

(rol

ling

4Q)

Rent growth NPI

Rolling Four Quarters

Rental Income Growth vs NPI (Rolling Four Quarters)

Rent Growth Driving Returns

NPI Capitalization Rates: Long-Term Trend

Spread to 10-year U.S. Treasuries

18

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

1978

419

794

1980

419

814

1982

419

834

1984

419

854

1986

419

874

1988

419

894

1990

419

914

1992

419

934

1994

419

954

1996

419

974

1998

419

994

2000

420

014

2002

420

034

2004

420

054

2006

420

074

2008

420

094

2010

420

114

2012

420

134

2014

420

154

4QM

A Va

lue

Wei

ghte

d Ca

p Ra

te Cap Rate 20Y Avg

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

1978

419

794

1980

419

814

1982

419

834

1984

419

854

1986

419

874

1988

419

894

1990

419

914

1992

419

934

1994

419

954

1996

419

974

1998

419

994

2000

420

014

2002

420

034

2004

420

054

2006

420

074

2008

420

094

2010

420

114

2012

420

134

2014

420

154

Spread 20Y Avg

Implied Appraisal Cap Rates

Cap Rate Compression also Helping to Drive Returns

But high spread to Treasuries (over 200 bp)

Yet starting to see warnings in headlines

4/18

Apartment Markets Mixed in the April NMHC Quarterly Survey Construction financing less available

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Moody’s/RCA Commercial Property Price Indices

FIRST MONTHLY DECLINE IN PRICES IN 6 YEARS: FEB TOO

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan

Apr Ju

lO

ctJa

nA

pr Jul

Oct

Jan

Apr Ju

lO

ctJa

nA

pr Jul

Oct

Jan

Apr Ju

lO

ctJa

nA

pr Jul

Oct

Jan

'10 '11 '12 '13 '14 '15 '16

Mon

thly

Per

cent

age

Cha

nge

in P

rices

RCA tracks transactions over $2.5 million

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0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

15-1 15-2 15-3 15-4 16-1

NCREIF Quarterly Returns

Returns have been dropping – but back to long term average

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0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

15-1 15-2 15-3 15-4 16-1

Columbus CBSA Total Return (Unleveraged)

Approx. $750 billion

Columbus also down 1st quarter of 2016 although still quite strong for past four quarters.

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PREA CONSENSUS SURVEY

Institutional Investors and Plan Sponsors expect returns to continue to drop through 2019.

LOAN ORIGINATIONS IN ‘06 & ‘07 WHAT HAPPENS IN ’16 & ‘17?

Key Property Sectors, Office, Industrial, Retail, Apartment

0

50

100

150

200

250

300

350

400

450

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$ B

illion

s

CMBS Non-CMBS

Refinancing the 2006 and 2007Originations

Outlook under Baseline Moody’s Forecast of RCA Market CPPI’s

HEADWIND: UPCOMING WAVE OF MATURITIES/OPPORTUNITIES

Due to tighter lending standards many loans will require more equity when refinanced.

28

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Apartment Hotel Industrial Office Retail

National Return by Property Type 2016-1

‹#›

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

15-1 15-2 15-3 15-4 16-1

Columbus vs. Nation Last 5 quarters

Columbus National

Top 10 Markets versus Other Markets

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

San

Fran

cisc

o

Dalla

s

Rive

rsid

e

Los A

ngel

es

Bost

on NPI

Seat

tle

Chic

ago

New

Yor

k Ci

ty

Was

hing

ton

DC

Hous

ton

Top 10 Markets and NPI

Top 10 Markets MV ($Bil) New York City $ 51.80 Washington DC $ 40.10 Los Angeles $ 37.32 Chicago $ 29.89 San Francisco $ 23.77 Seattle $ 20.30 Houston $ 19.93 Dallas $ 18.21 Boston $ 16.26 Riverside $ 12.39

2.67%

3.69%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Top 10 Markets Other Markets

Total NPI Returns: Top 10 Markets by Market Value

30 Columbus here 4th qtr of 2015

Capital has been moving beyond the top 10 markets

“From Great to Good” • Despite edging lower over the past 5 quarters, total returns remain healthy

relative to long term averages.

• CRE remains a strong relative performer across asset classes, supporting capital

flows into the sector

• Low interest rates in US and globally keep cap rates at historic lows

• NOI growth has slowed but still above historic average

• Occupancy can’t get much higher – always “frictional vacancy”

• May be in the 9th inning but likely to go into some “extra innings.”

• Money still talks – but nervous about current price levels. 31