economic & commercial real estate outlook

Economic and Commercial Real Estate Outlook

By Lawrence Yun, Ph.D.Chief Economist, National Association of REALTORS®

Presentation at NAR Annual Meetings

San Diego, CA November 13, 2015

Commercial Property Price Index

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

2013 - Q3

2014 - Q2

2015 - Q1

050

100150200250300

Source: Federal Reserve

Green Street Property Price Index – Even Higher

2000 - Jan2002 - Jan2004 - Jan2006 - Jan2008 - Jan2010 - Jan2012 - Jan2014 - Jan0

20

40

60

80

100

120

140

Dow Jones Industrial Average(Doubling since 2009)

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

2013 - Sep

2014 - Jan

2014 - May

2014 - Sep

2015 - Jan

2015 - May

2015 - Sep

0

4000

8000

12000

16000

20000

Lifetime Wealth at All-Time High

1990 - Q1 1993 - Q2 1996 - Q3 1999 - Q4 2003 - Q1 2006 - Q2 2009 - Q3 2012 - Q40

100002000030000400005000060000700008000090000

Consumer Confidence Index


20406080

100120140160

Median Household Income(Inflation Adjusted)

200020012002200320042005200620072008200920102011201220132014$50,000$51,000$52,000$53,000$54,000$55,000$56,000$57,000$58,000$59,000

Annual GDP … Below 3% for 10 straight years

19501953

19561959

19621965

19681971

19741977

19801983

19861989

19921995

19982001

20042007

20102013

-4-202468

10

GDP Annual Growth Rate

Sluggish Growth + Gap after Recession ($1.7 trillion gap … $5,000 per person)

1998 - Q1

1998 - Q3

1999 - Q1

1999 - Q3

2000 - Q1

2000 - Q3

2001 - Q1

2001 - Q3

2002 - Q1

2002 - Q3

2003 - Q1

2003 - Q3

2004 - Q1

2004 - Q3

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

2013 - Q3

10000

11000

12000

13000

14000

15000

16000

17000

18000

GDP in 2009 Dollars

Real GDP Real GDP W/O Recession

3% Growth Line

2.2% Growth Line

GDP Component on Commercial Construction and Sales

More inconsistent

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

2013 - Q3

2014 - Q1

2014 - Q3

2015 - Q1

2015 - Q3

-40

-30

-20

-10

0

10

20

30

40

Jobs(8 million lost … 13 million gained)

2000 - Jan 2001 - Dec2003 - Nov2005 - Oct 2007 - Sep2009 - Aug 2011 - Jul 2013 - Jun2015 - Mar120,000

125,000

130,000

135,000

140,000

145,000In thousands

Fresh Unemployment Insurance Claims

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr 2014 - Jan250

300

350

400

450

500

550

600In thousands

Unemployment Rate Falling

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr 2014 - Jan 2015 - Oct0

2

4

6

8

10

12

But Employment Rate Not Rising

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr 2014 - Jan 2015 - Oct54

56

58

60

62

64

66

Part-time and Underemployment(in thousands)

2000 - Jan 2002 - Apr 2004 - Jul 2006 - Oct 2009 - Jan 2011 - Apr 2013 - Jul 2015 - Oct20000210002200023000240002500026000270002800029000

Which State is Hot in Jobs? Year-on-year Growth as of Sept 2015

Top and Bottom States for JobsThe Best % Gain in 12 months

Utah 3.9Idaho 3.2South Carolina 3.1Florida 3.0Washington 3.0California 2.9Nevada 2.8Oregon 2.7North Carolina 2.4

The Worst % Gain in 12 months

Louisiana 0.0Alaska -0.2Wyoming -0.9West Virginia -1.7North Dakota -1.8

Dallas Still Creating Jobs; Houston Not(job growth rate from a year ago)

2013 - Jan

2013 - Mar

2013 - May

2013 - Jul

2013 - Sep

2013 - Nov

2014 - Jan

2014 - Mar

2014 - May

2014 - Jul

2014 - Sep

2014 - Nov

2015 - Jan

2015 - Mar

2015 - May

2015 - Jul

2015 - Sep

0.01.02.03.04.05.0

Dallas Houston

Fed Rate Hike in December?

Fed Rate Hike in December

then again in March

Fed Rate Hike in December

then again in March

then again in August

then again in …

Fed Policy and Mortgage Rate


Mortgage Rate Fed Funds Rate

What Determines Bond Yields?

• Federal Reserve’s short-term rate changes• Inflation and erosion of purchasing power• Foreign capital flow and demand for dollar• Savings rate• U.S. budget deficit• Printing of money• …

Federal Deficit - Shrinking( $ million, 12 month total)

2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan 2014 - Jan

-1600000-1400000-1200000-1000000

-800000-600000-400000-200000

0200000400000

Federal Debt … Cumulative ( $ million; debt held by public excluding intra-governmental holdings)

2001 - Jan 2002 - Dec 2004 - Nov 2006 - Oct 2008 - Sep 2010 - Aug 2012 - Jul 2014 - Jun0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

U.S. Dollar Reversing the Decline … Stronger and Stronger


100110120130140

Dollar Strength Index – Trade Weighted

No CPI Inflation – Yet

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr 2014 - Jan

-3-2-10123456

Oil Price


20406080

100120140160

Supply and Demand: Oil in U.S.

19

21

5

9

Rents Rising at 7-year high

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr 2014 - Jan-1012345

Renters' Rent

Rental Vacancy Rate(30-year low)

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

2013 - Q3

2014 - Q2

2015 - Q1

56789

101112

Multifamily Oversupply?

2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan 2014 - Jan0

100

200

300

400

500

600

Renters(8 million more households)

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

2013 - Q3

2014 - Q1

2014 - Q3

2015 - Q1

3032343638404244

Homeowners (2.5 million fewer households)

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

2013 - Q3

2014 - Q1

2014 - Q3

2015 - Q1

74.0

74.5

75.0

75.5

76.0

76.5

77.0

Commercial Real Estate

Commercial Investment Sales of Large Properties(Properties valued at $2.5 million and over)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

130212

362423

571

174

67147

233299

355424

470 500

REALTOR® Deal Size(Not $2.5 million Properties)

Under $500K

$500K to $2 M

Over $2 M

49%

35%

16%

CRE Financing: Small vs. Large CRE Markets

2011 2012 2013 2014 20150%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%REALTORS® - CRE Financing

Small Business AdministrationREITsRegional BanksPublic Cos.Private InvestorsOtherNational BanksLocal/Comm. BanksLife Insurance Cos.International banksCredit UnionsCMBS

2011 2012 2013 2014 20150%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Real Capital Analytics – CRE Financing

Pvt/OtherReg'l/Local BankNat'l BankInt'l BankInsuranceGov't AgencyFinancialCMBS

REALTORS® CRE Lending

2011 2012 2013 2014 20150%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Change in Lending Conditions over Past Year

Eased SignificantlyEased SomewhatNot ChangedTightened SomewhatTightened Signif -icantly

2011 2012 2013 2014 20150%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Average Loan-to-Value for CRE Transactions

Other100% Cash50%55%60%65%70%75%80%85%90%

Administrator Maria Contreras-Sweet SBA Loan for Small Business and Commercial Real Estate

• New … streamlined process• Match.com concept

CRE Sales: Small vs. Large 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

2013.Q4

2014.Q1

2014.Q2

2014.Q3

2014.Q4

2015.Q1

2015.Q2

2015.Q3

-100%

-50%

0%

50%

100%

150%

200%

Sales Volume (YoY % Chg)Real Capital Analytics CRE Markets REALTOR® CRE Markets

Sources: NAR, Real Capital Analytics

REALTORS® Vacancy Rates

201201

201201

201201

201201

201201

201201

201201

201201

201201

201201

201201

2010.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%REALTORS® Commercial Vacancy Rates

Office Industrial Retail Multifamily Hotel

Source: National Association of REALTORS®

REALTORS® CRE Construction Picks Up

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

2013.Q4

2014.Q1

2014.Q2

2014.Q3

2014.Q4

2015.Q1

2015.Q2

2015.Q3

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%New Construction Leasing Volume

% C

hang

e, Q

uart

er-o

ver-

quar

ter

Source: National Association of REALTORS®

CRE Prices: Small vs. Large 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

2013.Q4

2014.Q1

2014.Q2

2014.Q3

2014.Q4

2015.Q1

2015.Q2

2015.Q3

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

Sales Prices (YoY % Chg)Real Capital Analytics CRE Markets REALTOR® CRE Markets


CRE Spreads: Small vs. Large CRE Markets

10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q20

200

400

600

800

1000

1200CRE Spreads: Cap Rates to 10-Yr. T-Notes (bps)

RCA Cap Rates REALTORS Cap Rates


®

SIOR CRE Index

2005.Q3

2006.Q2

2007.Q1

2007.Q4

2008.Q3

2009.Q2

2010.Q1

2010.Q4

2011.Q3

2012.Q2

2013.Q1

2013.Q4

2014.Q3

2015.Q2

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

SIOR IndexNortheast Midwest South

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

SIOR IndexIndustrial Office

Source: SIOR, NAR

CCIM Quarterly Market Trends

Forecast and Risks

Economic Forecast2013 2014 2015

Forecast2016

ForecastGDP Growth 2.2% 2.6% 2.3% 3.0%

Job Growth +2.3 million +3.0 million +2.4 million +2.7 million

CPI Inflation 1.5% 1.6% 0.3% 3.2%

Consumer Confidence

73 87 99 101

10-year Treasury 2.5% 2.6% 2.2% 3.3%

REALTORS® CRE Outlook

Commercial Real Estate Vacancy Forecast (%)2014.Q3 2014.Q4 2015.Q1 2015.Q2 2015.Q3 2015.Q4 2016.Q1 2016.Q2 2016.Q3 2016.Q4 2014 2015 2016

Office 15.7 14.9 15.1 15.9 15.8 15.5 15.3 15.1 14.9 14.8 16.0 15.6 15.0Industrial 9.9 11.6 11.3 10.8 10.3 9.8 9.4 9.0 8.5 8.4 12.0 11.7 8.8Retail 13.8 12.5 13.7 13.2 13.0 12.7 12.3 12.1 11.9 11.6 13.8 13.2 12.0Multifamily 6.1 6.8 8.4 6.6 6.7 6.6 6.6 6.6 6.6 6.7 6.6 7.1 7.1Source: NAR

Commercial Property Price Indices Forecast 2008 2009 2010 2011 2012 2013 2014 2015 2016NCREIF 215.2 165.1 168.2 186.5 195.2 211.9 224.9 249.8 249.0Green St. Advisors 86.1 63.5 74.4 87.1 92.2 99.4 106.7 117.5 115.5Sources: NAR, NCREIF, Green Street Advisors

2/3 of Members used 1031 Like-Kind Exchanges

40%

14%4%5%

37%

Exhibit 3-1: Number of LKE Transactions for All Members 2011-14

1 - 34 - 67 - 12More than 12None

1031 and Economic Impact

Less than 10%

10% to 24%

25% to 49%

50% to 100%

Greater than 100%

Not applicable

16%

55%

16%

5%

1%

7%

Exhibit 3-9: Average Capital Investment in Property Improvements (% of Property's Fair Market Value)

Like-Kind Exchanges: Potential RepealREALTORS® reported that 40% of 2011-14 transactions

would not have occurred, absent IRC Section 1031

Commercial Residential0%

20%

40%

60%

80%

100%

Likelihood of LKE Transactions NOT Occurring w/out Sec 1031100%75% - 99%50% - 74%25% - 49%1% - 24%