Economic and Commercial Real Estate Outlook

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at NAR Annual ConferenceCommercial Real Estate & Economic Trends Forum

San Francisco, CA

November 8, 2013

GDP Growth … Unimpressive but no Fresh Recession

(Could be on the verge of recession if not for housing recovery)

2005 - Q1

2005 - Q3

2006 - Q1

2006 - Q3

2007 - Q1

2007 - Q3

2008 - Q1

2008 - Q3

2009 - Q1

2009 - Q3

2010 - Q1

2010 - Q3

2011 - Q1

2011 - Q3

2012 - Q1

2012 - Q3

2013 - Q1

-5-4-3-2-1012345

% growth from one year ago

U.S. Total Payroll Jobs(8 million lost … 7 million gained)

2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan124000

126000

128000

130000

132000

134000

136000

138000

140000In thousands

States with Fast Job Growth State Job Growth Rate

1 North Dakota 3.2%2 Utah 2.7%3 Idaho 2.5%4 Texas 2.4%5 Colorado 2.3%6 Minnesota 2.3%7 Georgia 2.1%8 Washington 2.1%9 Arizona 2.0%

10 New Jersey 2.0%

Unemployment Rate

2000 - Jan2001 - Oct 2003 - Jul 2005 - Apr2007 - Jan2008 - Oct 2010 - Jul 2012 - Apr0

2

4

6

8

10

12

Employment Rate

2000 - Jan2001 - Oct 2003 - Jul 2005 - Apr2007 - Jan2008 - Oct 2010 - Jul 2012 - Apr54

56

58

60

62

64

66

Labor Force Participation Rate:Record Low for Men and Cyclical Low for Women

(Adults 20 years old and up)

1970 - Jan 1975 - Jul 1981 - Jan 1986 - Jul 1992 - Jan 1997 - Jul 2003 - Jan 2008 - Jul4045505560657075808590

Women Men

Well Shy of Long Run Trend (6 to 8 million more jobs needed)

1970 - Jan 1975 - Jul 1981 - Jan 1986 - Jul 1992 - Jan 1997 - Jul 2003 - Jan 2008 - Jul60

70

80

90

100

110

120

130

140

150In millions

Consumer Spending Growth(2% growth; not 3% or 4%)

1980 - Q1 1984 - Q2 1988 - Q3 1992 - Q4 1997 - Q1 2001 - Q2 2005 - Q3 2009 - Q4

-4

-2

0

2

4

6

8

Business Spending Growth(3% growth; not sustained 5% to 10%)

1980 - Q1 1984 - Q2 1988 - Q3 1992 - Q4 1997 - Q1 2001 - Q2 2005 - Q3 2009 - Q4

-20

-15

-10

-5

0

5

10

15

20

25

Monetary and Fiscal Policies

Monetary Policy by Federal Reserve (zero rate policy to 2015 ?)

20052006

20072008

20092010

20112012

2013 foreca

st

2014 foreca

st0

1

2

3

4

5

6

Fed Funds %

Federal Reserve Balance Sheet from Quantitative Easing

2005 - Jan 2006 - Apr 2007 - Jul 2008 - Oct 2010 - Jan 2011 - Apr 2012 - Jul0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

Total Asset Purchase

$ million

Consumer Price InflationLess than 2%

(% change from one year ago)

2003 - Jan 2004 - Jun 2005 - Nov2007 - Apr 2008 - Sep 2010 - Feb 2011 - Jul 2012 - Dec

-3-2-10123456

Core Overall

Rising Renters’ and Homeowners’ Rent Growth (Above 2% and On the Way to 3%)

2003 - Jan 2004 - Jun 2005 - Nov2007 - Apr 2008 - Sep 2010 - Feb 2011 - Jul 2012 - Dec-1

0

1

2

3

4

5

Owners' Equivalent Rent Renters' Rent

Household Net Worth

2000 - Q1

2000 - Q4

2001 - Q3

2002 - Q2

2003 - Q1

2003 - Q4

2004 - Q3

2005 - Q2

2006 - Q1

2006 - Q4

2007 - Q3

2008 - Q2

2009 - Q1

2009 - Q4

2010 - Q3

2011 - Q2

2012 - Q1

2012 - Q4

40000

45000

50000

55000

60000

65000

70000

75000$ billion

Federal Government Spending(Stimulus … Flat … Decline)

2005 - Jan 2006 - Apr 2007 - Jul 2008 - Oct 2010 - Jan 2011 - Apr 2012 - Jul2.00

2.20

2.40

2.60

2.80

3.00

3.20

3.40

3.60

3.80$ trillion

Shrinking Budget Deficit(in $billion)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-1600

-1400

-1200

-1000

-800

-600

-400

-200

0

Federal Government Annual Spending/Revenue

1992 - Jan1995 - Oct 1999 - Jul 2003 - Apr2007 - Jan2010 - Oct0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Tax RevenueGovt Spending

$ trillion

Federal Debt Held By Public(Cumulative Accumulation as % of GDP)

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20140

10

20

30

40

50

60

70

80

Germany

• Too High Trade Surplus• No Stimulus• Budget Surplus in 2013 (though still has high

debt from prior deficits)• Blame Germany for holding back the World

Economy?

• Or Emulate Germany’s Economic Reforms?

International Sovereign Borrowing CostCountry 10-year Government Borrowing Cost

Japan 0.6%

Switzerland 1.1%

Germany 1.7%

France 2.3%

Canada 2.4%

U.S. 2.5%

Britain 2.6%

China 4.0%

Spain 4.1%

Italy 4.2%

Russia 7.5%

India 8.6%

Greece 8.7%

Brazil 11.6%

Consumer ConfidenceNow and About Future

2000 - Jan2001 - Oct 2003 - Jul 2005 - Apr2007 - Jan2008 - Oct 2010 - Jul 2012 - Apr0

20406080

100120140160180200

Expectations Present

Productivity and Income DoublingProductivity Growth Years for Income to Double Examples

1% 72 years U.S. today?

2% 36 years 1970 to 2007 (pre-financial market crash)

3% 24 years U.S. post-war to 1970

5% 14 years Asian Tigers

GDP Forecast

2014 2015 2016 2017 2018 2019 2020 2021 2022 20232.0

2.5

3.0

3.5

4.0

4.5

5.0

CBOWhite HouseBlue Chip Consensus

Commercial Market Activity

Transactions Up 27% YoY – 2013 YTD

Source: Real Capital Analytics

'06 '07 '08 '09 '10 '11 '12 '13$0

$20,000,000,000

$40,000,000,000

$60,000,000,000

$80,000,000,000

$100,000,000,000

$120,000,000,000

$140,000,000,000

$160,000,000,000

$180,000,000,000 Individual Portfolio Entity

'06 '07 '08 '09 '10 '11 '12 '13-100%

-50%0%

50%100%150%200%

CRE Prices Advance – CBD Off & Apt Lead

'07 '08 '09 '10 '11 '12 '1375

125

175

225Moody’s/RCA CPPI

Apartment

Industrial

Retail

CBD-Office

Sub - Office

Source: Real Capital Analytics

Spreads Remain Elevated

Source: Real Capital Analytics

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

100

200

300

400

500

600

700

10yr UST* Cap Rate Spread (bps)

REALTOR® Markets Deal Size

< $250,000

$250,000 - $500,000

$500,000 - $1,000,000

$1,000,000 - $2,000,000

$2,000,000 - $5,000,000

$5,000,000 - $10,000,000

> $10,000,000

21%

22%

26%

17%

12%

1%

2%

2013 CRE Lending Survey: Value of most recent sales transaction

Source: NAR

REALTOR® CRE Markets Rebound

2008.Q4

2009.Q1

2009.Q2

2009.Q3

2009.Q4

2010.Q1

2010.Q2

2010.Q3

2010.Q4

2011.Q1

2011.Q2

2011.Q3

2011.Q4

2012.Q1

2012.Q2

2012.Q3

2012.Q4

2013.Q1

2013.Q2

2013.Q3

-100%

-50%

0%

50%

100%

150%

200%

Sales Volume (YoY % Chg)

Major CRE Markets Realtor CRE Markets

Sources: NAR, Real Capital Analytics

Deals > $2.5M

Prices Accelerate in REALTOR® Markets

2008.Q4

2009.Q1

2009.Q2

2009.Q3

2009.Q4

2010.Q1

2010.Q2

2010.Q3

2010.Q4

2011.Q1

2011.Q2

2011.Q3

2011.Q4

2012.Q1

2012.Q2

2012.Q3

2012.Q4

2013.Q1

2013.Q2

2013.Q3

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Sales Prices (YoY % Chg)

Moody’s/RCA CPPI - Major Markets Realtor CRE Markets

Sources: NAR, Real Capital Analytics

8%

17%

25%

7%6%

4%

18%

1% 11%

3%Current sources of financing for commercial dealsNational banks (“Big four”)Regional banksLocal banksCredit unionsLife insurance companiesREITsPrivate investorsPublic companiesSmall Business AdministrationOther, please specify

Source: NAR

Small Banks Important to REALTORS®

SIOR Markets in Recovery

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0SIOR Commercial Real Estate Index

Northeast Midwest South West

Source: SIOR, NAR

CCIM Quarterly Market Trends

Apartment Fundamentals

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

U.S. Apartment Fundamentals

Completions Net Absorption Vac %

Source: NAR, Reis

Apartment Rents

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Asking Rent $ Asking Rent % Chg

Source: Reis

Apartment Vacancy Comparison

New Haven

Syracuse

New York

San Diego

Minneapolis

Oakland-East Bay

Buffalo

U.S. NATIO

NAL

Greensboro

/Winsto

n-SalemAtla

nta

Columbia

Jackso

nville

Houston

Little Rock

Memphis0.01.02.03.04.05.06.07.08.09.0

APARTMENT Vacancy Rates

Source: NAR, Reis

Apartment Investments

Avg. PPU (K)

Source: Real Capital Analytics

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

4.0%4.5%5.0%5.5%6.0%6.5%7.0%7.5%8.0%8.5%9.0% Avg. Cap Rate

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

$- $5,000,000,000.0

$10,000,000,000.0 $15,000,000,000.0 $20,000,000,000.0 $25,000,000,000.0 $30,000,000,000.0 $35,000,000,000.0 $40,000,000,000.0

$ Volume

2013 YTD: $45.3 B

Renter Households

1980 - Q11984 - Q21988 - Q31992 - Q41997 - Q12001 - Q22005 - Q32009 - Q425,000

27,000

29,000

31,000

33,000

35,000

37,000

39,000

41,000In thousands

Homeowner Households has not Grown since 2006 … but Primed to Grow

1980 - Q11984 - Q21988 - Q31992 - Q41997 - Q12001 - Q22005 - Q32009 - Q450,000

55,000

60,000

65,000

70,000

75,000

80,000In thousands

Household Formation Bursting Out(in millions)

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

20120.000.200.400.600.801.001.201.401.601.802.00

Office Fundamentals

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-150,000,000

-100,000,000

-50,000,000

0

50,000,000

100,000,000

150,000,000

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

U.S. Office Fundamentals

Completions Net Absorption Vac %

Squa

re F

eet

Source: NAR, Reis

Office Rents

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Asking Rent $ Asking Rent % Chg

Source: Reis

Office Vacancy Comparison

Distric

t of C

olumbia

New York

Little Rock

Birmingham

Nashville

New Orle

ans

San Francisco

U.S. NATIO

NALDalla

s

San Bernard

ino/Riversi

de

Memphis

Las V

egas

Phoenix

Detroit

Dayton0.0

5.0

10.0

15.0

20.0

25.0

30.0

OFFICE Vacancy Rates

Source: NAR, Reis

Office Investments

Source: Real Capital Analytics

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0% Avg. Cap Rate

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

$- $10,000,000,000.0 $20,000,000,000.0 $30,000,000,000.0 $40,000,000,000.0 $50,000,000,000.0 $60,000,000,000.0 $70,000,000,000.0 $80,000,000,000.0 $90,000,000,000.0

$ Volume

2013 YTD: $31.5B

Jobs in Professional Business and Financial Services … at New Peak

2000 - Jan 2001 - Jul 2003 - Jan 2004 - Jul 2006 - Jan 2007 - Jul 2009 - Jan 2010 - Jul 2012 - Jan 2013 - Jul23.0

23.5

24.0

24.5

25.0

25.5

26.0

26.5

27.0In millions

Retail Fundamentals

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-30,000,000

-20,000,000

-10,000,000

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

0.0

2.0

4.0

6.0

8.0

10.0

12.0

U.S. Retail Fundamentals

Completions Net Absorption Vac %

Squa

re F

eet

Source: NAR, Reis

Retail Rents

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Asking Rent $ Asking Rent % Chg

Source: Reis

Retail Vacancy Comparison

San Francisco

Fairfield County

Long Isl

and

Orange County

Northern

New Jerse

y

Los A

ngeles

San Jose

U.S. NATIO

NAL

Indianapolis

Chattanooga

Cleveland

Columbus

Colorado Springs

DaytonTulsa

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

RETAIL Vacancy Rates

Source: NAR, Reis

Retail Investments

Source: Real Capital Analytics

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0% Avg. Cap Rate

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

$-

$5,000,000,000.0

$10,000,000,000.0

$15,000,000,000.0

$20,000,000,000.0

$25,000,000,000.0

$30,000,000,000.0

$35,000,000,000.0 $ Volume

2013 YTD: $23.5B

Jobs in Retail Trade(Still Below Prior Peak)

2000 - Jan 2001 - Jul 2003 - Jan 2004 - Jul 2006 - Jan 2007 - Jul 2009 - Jan 2010 - Jul 2012 - Jan 2013 - Jul13.5

14.0

14.5

15.0

15.5

16.0 In millions

Spending Effect from Higher Home Prices18% cumulative gains over 2 years

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

$220,000

$240,000 Median Existing Home Price

Industrial Fundamentals

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-100,000,000

-50,000,000

0

50,000,000

100,000,000

150,000,000

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

U.S. Industrial Fundamentals

Completions Net Absorption Vac %

Squa

re F

eet

Source: NAR, Reis

Industrial Rents

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$4.30

$4.40

$4.50

$4.60

$4.70

$4.80

$4.90

$5.00

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0Asking Rent $ Asking Rent % Chg

Source: Reis

Industrial Vacancy Comparison

Orange County

Los A

ngeles

Miami

Seattle

St. Louis

Palm Beach

San Bernard

ino/Riversi

de

U.S. NATIO

NAL

Charlotte

Atlanta

Richmond

Memphis

Raleigh-Durh

am

San Jose

Boston

0.02.04.06.08.0

10.012.014.016.018.020.0

INDUSTRIAL Vacancy Rates

Source: NAR, Reis

Industrial Investments

Avg. PSF

Source: Real Capital Analytics

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0% Avg. Cap Rate

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

$- $2,000,000,000.0 $4,000,000,000.0 $6,000,000,000.0 $8,000,000,000.0

$10,000,000,000.0 $12,000,000,000.0 $14,000,000,000.0 $16,000,000,000.0 $18,000,000,000.0 $20,000,000,000.0

$ Volume

Jobs in Wholesale Trade(Still Below Prior Peak)

2000 - Jan 2001 - Jul 2003 - Jan 2004 - Jul 2006 - Jan 2007 - Jul 2009 - Jan 2010 - Jul 2012 - Jan 2013 - Jul5.1

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

6.0

6.1In millions

U.S. International TradeLong-Term Growth

1992 - Jan 1995 - Jan 1998 - Jan 2001 - Jan 2004 - Jan 2007 - Jan 2010 - Jan 2013 - Jan0

50000

100000

150000

200000

250000

Exports Imports

U.S. International TradeBut No Growth in Recent Years

2007 - Jan

2007 - May

2007 - Sep

2008 - Jan

2008 - May

2008 - Sep

2009 - Jan

2009 - May

2009 - Sep

2010 - Jan

2010 - May

2010 - Sep

2011 - Jan

2011 - May

2011 - Sep

2012 - Jan

2012 - May

2012 - Sep

2013 - Jan

2013 - May

0

50000

100000

150000

200000

250000

Exports Imports

International Dimension

International CRE Investment in U.S.

Source: Real Capital Analytics

Volume of International Transactions (April 2012 to March 2013)

REALTORS® Working With International Clients

• In Past 12 Months, 27 Percent of REALTORS® Have Worked with an International Client.– Clients Residing in Another

Country: 51 Percent.– Clients Residing in this Country:

49 Percent.– A Niche Market on Buyer Side:

Facility with languages and cultures very helpful.

– On Sellers Side—Understanding of foreign cultures helpful.

Percent of Total U.S. International Sales by CountryTop Countries—2013 Report

*China includes PROC, Hong Kong, Taiwan

CanadaChina

MexicoIndia

United KingdomGermany

ArgentinaIsrael

AustraliaKoreaBrazil

FranceVenezuela

Russia

23%12%

8%5%

5%3%

3%2%2%2%

2%2%2%

2%

Shares of the Top Countries of Origin to Total Reported International Transactions

Top State Destinations—2013 Report

Top 10 Destinations

Florida

California

Arizona

Texas

New York

Virginia

Nevada

Hawaii

Illinois

Michigan

Georgia

23%

17%

9%

9%

3%

3%

2%

2%

2%

2%

2%

Majority of International Buyers Pay All Cash

Impact of the Value of the Dollar on Foreign Purchases

U.S. Dollar vs. Chinese Yuan(Yuan per $)

2000 - Jan2001 - Oct 2003 - Jul 2005 - Apr2007 - Jan2008 - Oct 2010 - Jul 2012 - Apr5

5.5

6

6.5

7

7.5

8

8.5

U.S. Dollar vs. Euro($ per Euro)

2000 - Jan2001 - Oct 2003 - Jul 2005 - Apr2007 - Jan2008 - Oct 2010 - Jul 2012 - Apr0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Broad U.S. Dollar Strength/Weakness(Broad Trade Weighted)

2000 - Jan2001 - Oct 2003 - Jul 2005 - Apr2007 - Jan2008 - Oct 2010 - Jul 2012 - Apr80

90

100

110

120

130

140

REALTORS® Working With International Clients