Economic & Real Estate Bright Spots Blind SpotsK.C. Conway, MAI, CRE

Chief Economist | USAColliers InternationalKC.Conway@Colliers.com

www.colliers.com/us/kcconway

State of AtlantaSeptember 20, 2013

Two Questions to Think About:What are the Real Vs. Artificial Demand Drivers in today’s economy?

#1 – The FED’s Monetary Policy & GDP #2 – Housing Recovery

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QE 3

#3 Energy & On-shoring of Manufacturing

"OPEC forecast demand for its oil in 2014 is 29.61mm barrels per day down 250,000 barrels per day from

2013. It cited rising non-OPEC supply from the U.S."

#4 Re-making Global & U.S. Supply-Chain

U.S. GDP post 2009 Recession

CY / Qtr 2010 2011 2012 2013Q1 1.6% -1.3% 3.7% 1.1%Q2 3.9% 3.2% 1.2% 2.5%Q3 2.8% 1.4% 2.8%Q4 2.8% 4.9% 0.1%

Denotes 2nd weakest reading in 3 yrs

Fiscal & Monetary Policy10% of GDP & QE = <2% GDP

Turmoil in the Middle East & Syria

Entitlement Costs & ObamaCare A Dysfunctional DC (Congress, FED, etc.)

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Questions to Think About:What are the Greatest Risks to the U.S. Economy?

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Bernanke slide Spring 2007: Real or Artificial Demand Drivers - AGAIN!

Home Sales

Sta

rts

DevelopedLots Raw

Land

Lo

an

Payo

ffs

FinishedInventory

ConstructionCycle

Draws onLending Lines

AcquisitionLoans

CarryingCosts

Eco

nom

ic

Affordability Underwriting

Liq

uidity

Demographic

OwnerOccupied

ConstructionLoans

Existing Homes

Condo ConversionsCRE Loans

DemandSupply

Population Growth,Baby Boomers,Gen X, Gen YImmigration

Recent PriceAppreciation,

P&C Insurance,Property Taxes,Cost of Living,

Exotic Mortgages,Second Mortgages

Employment,Income,

Interest Rates,Alternative

Investments

Credit Scores,Liar Loans,NINA Loans

Securitization,Loan Servicing

Investors,FlippersFederal Reserve Bank of Atlanta – Supervision and Regulation

We had a lot of demand being generated from factors not tied to JOBS: i) investors; ii) speculators; iii) subprime mortgages.

We had a lot of Supply ramped up to meet this DEMAND that can’t stop on a dime.

NINJA Loans

(No Income, No Job or Ability to Pay)

Real Estate CycleWhere are we? What are the CRE drivers?

The Real Estate Cycle – We are still in Recovery Jobs – A new ICEE-Age (ICEE v FIRE)

Manufacturing – Cheap Energy Vs. Labor Port Markets & a PPMX Supply-Chain

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The ongoing trend of foreign-based companies setting up stateside operations is creating more manufacturing jobs in the US. Foreign manufacturers are taking advantage of the U.S. market."The global economics have shifted dramatically. The wind was in our face. Now, it’s a tailwind."According to the Reshoring Initiative, more than 200 companies have brought production back to the U.S over the past three years - creating more than 50,000 jobs. Manufacturers that have recently announced stateside expansions include Airbus, Boeing, Volkswagen, Mohawk Industries, Rolls-Royce, Siemens, and Wisconsin, Crystal Finishing Products (doubled its U.S. production of high-performance coatings over the past three years).

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Blind Spots: Get the bad news out upfront!

Blind Spots

Blind Spot s: Value of NFL Franchises Atl. Falcons not a Bright Spot (Jax & Atl 2 weakest in SE)

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Atlanta # 26 & <$1.0 billion New Orleans #23 & >$1.0 billion Tampa #21 Tennessee # 19 Carolina #18 Miami # 16

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QE 3

Blind Spot: FED Monetary Policy & Interest Rates

Is the FED really tapering QE? Why doesn’t the media report QE-3 as: “The FED’s $1.02 trillion annual

bond-buying program?” A cut to $65b from $85b simply matches the revised 2013 Fed deficit.

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Blind Spot: GDP – It is likely to remain below trend! U.S. is below trend most of past decade; 1H2013 GDP to be weakest in 4 yrs!

Blind Spot: UnemploymentIt’s worse than 7.3% - Which “U-rate” is FED targeting for 6.5%?

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U-3 Vs. U6 Unemployment Rates are the equivalent to: “Make it up” Vs “Count them all” Rates of Unemployment.

# 4: Housing – Both a Bright & Blind SpotHPA and NAHB Improved markets Index look bright - even déjà vu?

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Home Prices Rise in 41 of 50 States Q1 2012 to Q1 2013 – FHFA Home Price Index

Bright Spot – HousingThe NAHB IMI – Improved Markets Index

http://www.nahb.org/reference_list.aspx?sectionID=2223The NAHB/First American Improving Markets Index (IMI) tracks housing markets throughout

the country that are showing signs of improving economic health.

The index measures three sets of independent monthly data: i) employment growth (Census); ii) house price growth (Freddie Mac); and iii) single-family housing growth (Census - Permits) to identify the top improving markets. August is 8th consecutive month at least 70% of U.S. metros made the IMI list.

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Bright Spot – HousingNAHB IMI – August 2013 (NAHB.org/newsroom)

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Blind Spot - Housing Forget HPA - focus on H.O. rate, QRM debate, GSE’s future & HMI

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2001 52 58 60 59 58 59 57 59 55 46 48 55

2002 58 58 62 61 61 61 61 55 63 61 62 63

2003 62 63 56 55 60 63 65 67 67 69 68 69

2004 68 66 66 69 69 68 67 70 67 69 70 71

2005 70 69 70 67 70 72 70 67 65 68 61 57

2006 57 56 54 51 46 42 39 33 30 31 33 33

2007 35 39 36 33 30 28 24 22 20 19 19 18

2008 19 20 20 20 19 18 16 16 17 14 9 9

2009 8 9 9 14 16 15 17 18 19 17 17 16

2010 15 17 15 19 22 16 14 13 13 15 16 162011 16 16 17 16 16 13 15 15 14 17 19 212012 25 28 28 24 28 29 35 37 40 41 45 472013 47 46 44 41 44 52

(Seasonally Adjusted)

NAHB/Wells Fargo National HMI - History

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Blind Spot: The Capital Markets & CMBS A 2nd-Wave of CMBS ReFi comes ashore 2015-2017 & new SIFIs - like GE

1986 hit $1.0b

2007 CMBS peaked @ $234b

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Blind Spot – Capital Markets & CMBSTranslating the CMBS risks to Individual MSAs like Atlanta

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Bright Spots: As they say on Duck Dynasty, it’s now time to be happy, happy!

Bright SpotThere is a football connection!

Phil (Founder of Duck Commander), played college ball with Terri Bradshaw and passed up going into the NFL.

There is also a hairstyle connection.

Bright Spot: Bank Failures – GA may not lead in 2013

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2013 Bank Fafilures January 1 - Sept 13, 2013# Bank Failure - DBA @ Closing State Closing Date23 First National Bank also operating as The National Bank of El Paso22 En Espanol21 The Community's Bank CT 13-Sep-1320 Sunrise Bank of Arizona AZ 23-Aug-1319 Community South Bank TN 23-Aug-1318 Bank of Wausau WI 9-Aug-1317 First Community Bank of Southwest Florida (also operating as Community Bank of Cape Coral)FL 2-Aug-1316 Mountain National Bank TN 7-Jun-1315 1st Commerce Bank NV 6-Jun-1314 Banks of Wisconsin d/b/a Bank of Kenosha WI 31-May-1313 Central Arizona Bank AZ 14-May-1312 Sunrise Bank GA 10-May-1311 Pisgah Community Bank NC 10-May-1310 Douglas County Bank GA 26-Apr-139 Parkway Bank NC 26-Apr-138 Chipola Community Bank FL 19-Apr-137 Heritage Bank of North Florida FL 19-Apr-136 First Federal Bank KY 19-Apr-135 Gold Canyon Bank AZ 5-Apr-134 Frontier Bank GA 8-Mar-133 Covenant Bank IL 15-Feb-132 1st Regents Bank MN 18-Jan-131 Westside Community Bank WA 11-Jan-13

TX13-Sep-13

GA in a 3-way tie with AZ and FL for most Bank

Failures in 2013 with 3 each.

Bright Spot: Job Growth may be stronger than estimated.

Large County Employment – June final estimateIn December 2012, national employment, as measured by the QCEW program, was 133.7 million, up by 1.9 percent or 2.4 million from December 2011.

The 328 U.S. counties with 75,000 or more jobsaccounted for 71.3 percent of total U.S. employment and 77.0 percent of total wages.

These 328 counties had a net job growth of 1.8 million over the year, accounting for 73.3 percent of the overall U.S. employment increase.

The largest 358 metros created 464,000 more jobs in 2012 than the 1,472,000 jobs previously estimated, a 32% increase from initial employment gain figures.310 of the 358 metros showed job growth

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Bright Spot: Jobs… Large Counties other than CA, FL, TXNC & SC have 15 Large Counties & they are producing jobs!

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North Carolina

South Carolina

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Bright Spot: ONEI MSAs These are the top-102 growth MSAs in the U.S. ranked monthly.

The On Numbers Economic Index measures the relative vitality of 102 major metropolitan areas with populations of more than 500,000. Its 18-part formula assesses private-sector job growth, unemployment, personal earnings, housing-price appreciation, and construction and retail activity.

http://www.bizjournals.com/bizjournals/on-numbers/

August 2013 On Nubers Economic Index MSA Rankings

Rank MetroOverall score

5-year private-sector

job growth

1-year private-sector

job growth

Un- employ rate

Weekly earnings

per worker

5-year earning

s growth

1-year house value

growth

1 Austin 84.929 10.62% 3.70% 5.80% $942.65 14.93% 7.65%2 Provo, Utah 83.443 5.58% 4.67% 5.30% $782.25 42.70% 8.41%3 San Jose 80.225 2.53% 3.24% 6.90% $1,468.70 13.74% 13.72%4 Dallas-Fort Worth 78.642 4.89% 3.74% 6.70% $933.98 10.60% 5.33%5 Oklahoma City 78.344 3.52% 2.32% 5.40% $792.97 18.41% 3.04%6 Houston 75.201 7.38% 3.50% 6.70% $954.56 5.52% 4.26%7 Ogden, Utah 74.161 1.76% 3.26% 5.20% $731.34 19.40% 5.77%8 Salt Lake City 72.651 2.65% 4.15% 5.00% $931.01 6.86% 9.18%9 Honolulu 72.625 -0.81% 1.52% 4.70% $816.65 11.16% 4.95%10 Denver 72.156 1.61% 3.30% 7.30% $987.12 13.95% 7.52%

Atlanta ranks 48th behind Greenville & Charleston SC, Nashville & Tampa.

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Bright Spot: Ports

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Panama Canal Locks Expansion ProjectA Picture is worth a thousand words – First look at Locks being delivered

r12,500 TEU

5,000 TEU3,000 TEU

Bright Spots2H 2013 Port Trends: SE Growth

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Bright Spots 2H 2013 Port Trends: Inland Ports

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Bright Spots 2H 2013 Trends: Rail & Intermodal

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Is Q2 2013 a blip for Union Pacific, or …

Union Pacific:• Serves West

coast ports;

• Least amount of coal moved;

• Most Asia exposure;

• Q2 2013 only Class I RR with down volume and revenue.

Port Rupert

Port of Mobile (deepest in Gulf)

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Bright Spot: Growth in E-Commerce Retail Sales

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Bright Spot: Growth in E-Commerce Retail Sales

But ….

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Blind Spot: E-Commerce AFTER July 2013 & Sales Tax

E-Commerce Convenience & Value Proposition will offset sales taxes.

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Bright Spot: Grocery Retailing 3 of top-10 spots on NRF’s 2013 “Hot 100 Retailers” list are grocers.

What are the Risks / Opportunities ?Risks Opportunities

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Monetary Policy & Interest Rates

Global Political Hot-Spots & Capital Flows

Capital Markets & CMBS 2015-2017

ICEE Vs. FIRE MSAs (Traditional FIRE MSAs becoming ICEE)

R.E. Logistics / Supply-Chain Leadership This trend is fueling retail & warehouse.

Capital Markets & CMBS Refi Wave #2

Continued <2% GDP & <200k jobs/month

“Adaptive Re-Use” & Value Enhancement

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 Creatively Re-translated by KC Conway it means:

 Beezow:   Client Response to an error-free, on-time, appraisal report.

 Doo-doo: All too often the Client reaction to the appraisal analysis.

And …

Zopittybop-bop-bop is: How appraisers will feel following future regulatory and education involvement in the appraisal profession by the ASB, APB (recognized appraisal practices board), CFPB and Interagency Appraisal Guidance by bank regualtors!

Beezow Doo-doo Zopittybop-bop-bopSource: Dylan Stableford, Yahoo! News – Aug 20, 2013 – Beezow Doo-doo Zopittybop-bop-bop

is really the name of an Iowa man who has quite a colorful history with the law.

Conclusion:

Thank YouK.C. Conway, MAI, CREChief Economist | USAColliers InternationalKC.Conway@Colliers.com

www.colliers.com/us/kcconway