Post on 20-Jun-2020
transcript
Commercial Real Estate 2017: Changes in the Air
Commercial Economic Issues & Trends Forum
REALTORS® Legislative Meetings & Trade Expo | @NARLegislative
Washington, DC | May 18, 2017
GEORGE RATIU | @GeorgeRatiu
What is a VCR?
What is a VCR?
• Video Cassette Recorder
• Developed in the 1960s; reached mass market in the 1970s
• VCR was the home TV recording tech of 1980s-90s
• 2016: VCR was officially out of production
Do you remember RZRs & Curves? iPhone’s getting old…
• Motorola RZR – marketed 2004-2007
• Blackberry Curve – introduced in 2007
• 2017: iPhone turns 10 years old
May we live in interesting times…TECHNOLOGYArtificial intelligenceAutonomous vehiclesSharing services3D PrintingBiotech
INFRASTRUCTUREPublic roadsTransportation hubs
POLITICSPresidential electionCongressStates / Cities
DEMOGRAPHICSGen X / Gen Y / Gen ZUrban / RuralWealth disparity
MONETARY/FISCALFunds target rateFederal budget
FINANCECapital marketsFintechCrowdfunding
GLOBALEconomic weaknessBrexit/NationalismMigrationWars/military conflicts
SOCIALWealth disparityCannabis legalization
…as we swim in a sea of acronyms…
GDP ROI
NOI
ADS
DSCR
CAP
IRR
IR
BPS
DCF
CDO
CMBS
CDS
CPI
EBITDAEPS
FOMC
FX
GAAPLIBOR
ISM
LOI
NPV
NYSE
DJIA
OECD
ROE
SAAS
VAT
WTO
WTI
P&L
P/E
EXP
IMP $/SF
CAPEX
B2B
LTV
GDP ROI
NOI
ADS
DSCR
CAP
IRR
IR
BPS
DCF
CDO
CMBS
CDS
CPI
EBITDAEPS
FOMC
FX
GAAPLIBOR
ISM
LOI
NPV
NYSE
DJIA
OECD
ROE
SAAS
VAT
WTO
WTI
P&L
P/E
EXP
IMP $/SF
CAPEX
B2B
LTV
PEOPLE
Demographics accelerate change
10.5%
23.6%
15.4%24.5%
25.9%
2017 U.S. Population by Demographic Cohort
Swing/Silent (69+)
Baby Boomers (50-68)
Gen X (38-49)
Gen Y (20-37)
Gen Z (0-19)
Source: Sparks & Honey Source: Pew Research Center
Monetary policy helped housing, hurt savings…
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FOMC Fed Funds Target Rate (EOP, %)
Source: Federal Reserve Board
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Households: Nonfinancial/Tangible Assets: Real Estate (NSA, Bil.$)
Source: Federal Reserve Board
2006.Q2: $22.7T > 2016.Q4: $23.1T
Multifamily demand follows population growth
• Mixed-use urban development; live/work/play
• Class A supply; small floorplans; amenities
• Demand remains robust; 2016 net absorption 201,300 units
• 2016 Completions: 242,800 units
• Vacancy moves up (4.9%), moderates rent growth
• Affordability declines
Bull market boosts household wealth
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Households & Nonprofit Org: Total Financial Assets (NSA, Bil.$)
2007.Q3: $52.6T > 2016.Q4: $75.5T
Source: Federal Reserve Board
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S&P 500 (EOP, 1941-43=10) DJIA (EOP, May 26, 1896=40.94)
Source: Wall Street Journal
Office demand drives vacancy under 13%
• Payroll employment advances; professional & business svcs.
• Mobile workforce; increased telecommuting
• Space efficiency, flexible designs
• Sustainability tied to workforce retention & financial impact
• Positive net absorption + moderate completions = Vacancy @ 12.9%
Industrial absorption boosts rents
• Increased trade
• Rising e-commerce
• “Last mile” distribution
• Intermodal logistics
• Panama Canal; East coast ports
• Net absorption: 256.7M SF
• Net rent growth accelerates, $6.6 PSF
Corporations remain cautious
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Real Corporate Profits After Tax (SAAR, Bil.Chn.2009$)
2016.Q3: $1.5 Trillion
Source: BEA
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Corporate Cash/Cash Equivalent Holdings (NSA, Bil.$)
2016.Q4: $2.1 Trillion
Source: Federal Reserve
Retail transformation
• Department stores lose ground
• Food/drinking services: NY’s Eataly
• Small/discount grocery stores heat up; Aldi, Lidl
• Completions remain low, availability at 7.1%
• Rents experience solid growth, $16.6 PSF
Speaking of investors…
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0.390.570
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Ch
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Interest Rates % (10-yr Gov bonds)
Source: Economist Intelligence Unit; *5-year yield
Global CRE investors hit ‘Pause’ button, search for yield
16 U.S. Markets in Global Top 30
Market Sales Vol. ($B)
NYC Metro $60.0LA Metro $34.9SF Metro $30.0
London Metro $27.7Paris $23.1
DC Metro $18.5Dallas $18.0
Chicago $17.5Tokyo $16.4
Atlanta $15.6Miami/So Fla $15.1
Shanghai $14.8Boston Metro $13.9
Seattle $13.7Hong Kong $13.5
Amsterdam/Randstad $10.7Denver $10.5Seoul $9.9
Phoenix $9.6Berlin-Brandenburg $9.6
Sydney $9.3Austin $8.3
Singapore $8.1Houston $8.0
Rhine-Ruhr $7.9Madrid $7.5
San Diego $7.2Las Vegas $7.2Munich $6.7
Frankfurt/Rhine-Main $6.7
YoY % Chg.
Source: Real Capital Analytics
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billionsAmericas Asia Pac EMEA
2016: $860B; -11% YoY2017.Q1: $157B; -19% YoY
Where is global CRE money flowing (large cap)?Q1'17 Last 12 Months
$b YOY Chg $b YOY Chg
United States 76.1 -19% 387.8 -8%Germany 17.1 40% 68.5 -4%United Kingdom 10.4 -47% 53.1 -45%China 4.2 -40% 35.0 -2%Japan 7.2 -13% 31.3 -19%France 3.9 -37% 30.5 -12%Australia 1.8 -59% 23.8 -26%Canada 3.2 -19% 18.5 1%Spain 3.5 63% 17.9 76%Sweden 2.9 -24% 17.3 12%Netherlands 2.1 -29% 14.7 7%South Korea 2.0 242% 14.0 30%Hong Kong 2.9 -41% 13.2 -10%Italy 1.7 -40% 10.1 -4%Singapore 2.3 170% 10.0 107%All Others 15.1 -23% 78.1 -13%
Grand Total 156.8 -19% 823.9 -10%
YoY Sales Volume Gains - Q1.2017
- San Francisco: 15%- Dallas: 11%- Charlotte: 45%- Houston: 10%- Baltimore: 97%
U.S. CRE is a tale of two markets…
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Sales Volume (YoY % Chg)
Real Capital Analytics CRE Markets
REALTOR® CRE Markets
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Sale Prices (YoY % Chg)
Real Capital Analytics CRE Markets
REALTOR® CRE Markets
Sources: NAR, Real Capital Analytics
Large cap U.S. markets follow global trends…
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$b Transaction Volume
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Year-Over-Year Change
Source: Real Capital Analytics
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Cap Rates
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Moody’s/RCA CPPI™
Year-Over-Year Change
…as yield drives gains in secondary CRE markets
2016Vol ($b) YOY
Office 141.7 -6%Retail 75.7 -16%Industrial 59.2 -24%Hotel 35.8 -29%Apartment 158.4 3%Dev Site 17.8 -26%Total 488.6 -11%Major Metros 206.1 -16%Secondary Markets 215.5 -3%Tertiary Markets 64.5 -12%
Source: Real Capital Analytics
6MM Apartment
6MM CBD Office
6MM Industrial
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6MM Suburban Office
NMM Apartment
NMM CBD Office
NMM Industrial
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Hotel
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Volume Change '16 vs '15
REALTORS® sales drop 4.4% in Q1.2017. Blip or trend?
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Per
cen
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ear-
ove
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ar
Sales Volume Sales Prices
Source: National Association of Realtors®
4%5%
8% 10%
14% 12%
13% 16%
21% 19%
37% 37%
2017.Q1 2016.Q4
REALTORS® Most Pressing Challenges
Inventory Shortage
Pricing Gap: Buyersvs Sellers
Local Economy
Financing
Other
National Economy
Distressed Properties
Capital markets retain liquidity at high end…
CRE Debt Universe - $3.76T
U.S. CharteredDepositoryInstitutionsCMBS, CDO, otherABS
GSEs (Freddie,Fannie)
Life InsuranceCompanies
Foreign BankingOffices in U.S.
Other
Source: Federal Reserve Board
CRE Equity Investments - $2.85T
Private Equity
REITs
Pension Funds
Life Insurance Cos.
Commercial Banks
Corporations
Foreign Investors
Gov't, GSEs & Others
Sources: Situs RERC, NAREIT, PREA, AFIRE, Prequin, Real Capital Analytics, NCREIF
…as financing in small cap markets diverges…
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Real Capital Analytics Lending Sources ($2.5M+)
Pvt/Other
Reg'l/Local Bank
Nat'l Bank
Int'l Bank
Insurance
Gov't Agency
Financial
CMBS
Source: Real Capital Analytics
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REALTOR® Commercial Real Estate Lending Sources
Small Business Administration
REITs
Regional Banks
Public Cos.
Private Investors
Other
National Banks
Local/Comm. Banks
Life Insurance Cos.
International banks
GSEs
Credit Unions
CMBS
Source: National Association of REALTORS®
…and lending conditions tighten, despite rising NOI
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2010 2011 2012 2013 2014 2015 2016
Change in Lending Conditions over Past Year
Eased Significantly
Eased Somewhat
Not Changed
TightenedSomewhat
TightenedSignificantly
Source: National Association of REALTORS®
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2012 2013 2014 2015 2016 2017
12-Month Change in NOI ($/SF) of properties sold/leased
Decreased 50% - 75%
Decreased 40% - 49%
Decreased 35% - 39%
Decreased 30% - 34%
Decreased 25% - 29%
Decreased 20% - 24%
Decreased 10% - 19%
Decreased 5% - 9%
No Change
Increased 20% - 25%
Increased 15% - 19%
Increased 10% - 14%
Increased 5% - 9%
Increased 1% - 4%
Source: National Association of REALTORS®
Legislative & regulatory uncertainties remain
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2011 2012 2013 2014 2015 2016
Causes of Insufficient Bank Capital for CRE Lending:
Other, please specify
Global economic uncertainty
U.S. Economic uncertainty
Inability of banks to dispose ofdistressed assetsNew/proposed US legislative andregulatory initiativesRegulatory uncertainty for financialinstitutionsSlow-down in pooling/packaging ofCMBSReduced NOI, property values, andequity
Source: National Association of REALTORS®
CRE Outlook – positive fundamentals for 2017
Commercial Real Estate Vacancy Forecast (%)
2016.Q4 2017.Q1 2017.Q2 2017.Q3 2017.Q4 2018.Q1 2018.Q2 2018.Q3 2016 2017 2018
Office 13.6 13.5 13.3 13.0 12.7 12.5 12.4 12.4 13.0 13.3 12.5
Industrial 9.4 9.2 9.0 8.7 8.4 8.1 7.9 7.9 9.4 9.1 8.1
Retail 13.2 12.5 12.5 12.5 12.6 12.7 12.8 13.1 12.0 12.6 12.8
Multifamily 5.9 6.5 6.3 6.1 6.5 6.2 6.1 6.2 6.3 6.2 6.2Source: National Association of REALTORS®
CRE Outlook – investment risks
Risks
• Economic growth > CRE Fundamentals
• Cost of funds vs. yield
• Legislative: • Tax reform • IRC Sec. 1031
• Regulatory: • Dodd-Frank (?)• Basel III - HVCRE
Spread Between CRE Yields or Going-in Cap Rates and 10-Year Treasury
• Economy
• Capital markets
• Property markets
• Office
• Industrial
• Retail
• Apartment
www.NAR.REALTOR/research-and-statistics
• Economic Overview
• Commercial Real Estate
• Survey Results
• Market Environment
• Lending Environment
• Appraisals
www.NAR.REALTOR/research-and-statistics
Commercial Real Estate 2017: Changes in the Air
Commercial Economic Issues & Trends Forum
REALTORS® Legislative Meetings & Trade Expo | @NARLegislative
Washington, DC | May 18, 2017
GEORGE RATIU | @GeorgeRatiu