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FTI INSIGHTS Report

3rd Quarter 2017

EXPERTS WITH IMPACTTM

Economic & Real Estate Report

Contents

Introduction ....................................................................................... 1

Summary of Key Economic Indicators ........................................... 2

5‐Year Graphical Snapshots of Selected Economic Indicators ............ 3

Labor Market ...................................................................................... 4

Gross Domestic Product (GDP) ........................................................... 5

Institute for Supply Management (ISM) Manufacturing Index .......... 5

Construction Spending ....................................................................... 6

The Architecture Billings Index (ABI) ............................................. 7

State of the Housing Market .............................................................. 7

PwC Real Estate Investor Survey ........................................................ 9

3Q17 Survey Highlights ................................................................. 9

PwC Real Estate Barometer ........................................................ 10

RCA Commercial Property Price Index (CPPI) ................................... 10

Green Street Commercial Property Price Index ............................... 11

Commercial Property Sales Analysis ................................................ 11

NCREIF Property Index ..................................................................... 13

Equity REIT Analysis ......................................................................... 15

FTSE National Association of REITs U.S. Real Estate Index .......... 15

Stock Market Recap .................................................................... 15

Capital Raising ............................................................................. 16

Initial Public Offerings (IPOs) ....................................................... 16

Commercial Lending ......................................................................... 16

Commercial Mortgage Backed Securities (CMBS) Market ............... 17

Property Sector Overviews ............................................................... 18

Office ........................................................................................... 18

Industrial ..................................................................................... 19

Retail ........................................................................................... 20

Apartment ................................................................................... 21

Hotel ........................................................................................... 21

Forecast ............................................................................................ 22

Introduction In the face of disruptive hurricanes and political turmoil, the

initial estimate of GDP growth indicated that the U.S. economy

remained resilient during 3Q17. Despite the first monthly

employment decline since 2010 (reported in September), the

labor market has remained strong, characterized by steady job

gains and low unemployment. Driven in large part by strong

corporate earnings and, to a lesser degree, President Trump’s

anticipated tax reform, leading stock indices continued to reach

new highs and set multiple records during 3Q17.

High confidence levels, supported by increased real disposable

income, continued to drive steady consumer spending. Inflation,

which had weakened earlier in the year, escalated this summer,

though it still remains below the Federal Reserve’s (Fed’s) 2.0%

target. Of concern, existing home sales continue to be negatively

impacted by restrained homebuilding and limited inventory

As the U.S. economic cycle enters an advanced stage, global

economic growth has accelerated in leading economies such as

Europe, Brazil and China, which has weakened the dollar. This

weakness has helped to strengthen the U.S. manufacturing

sector and increase U.S. exports. Driven by strong business

investment, factory, industrial and durable goods orders all

increased in September.

At its September Federal Open Market Committee meeting, the

Fed left its benchmark interest rate unchanged (ranged between

1.00% and 1.25%), but hinted at the likelihood of one more rate

hike in 2017, which would be the fourth rate hike since

December 2016. The Fed stated that starting in October 2017, it

will reduce its $4.5 trillion balance sheet (a portfolio comprised

of Treasury bonds, mortgage‐backed securities and other assets

it acquired in the wake of the financial crisis to stimulate the

economy) by $10 billion. Every three months, the limit on

reinvestment is scheduled to increase $10 billion to a maximum

of $50 billion per month.

Data from top real estate firms and information service

providers generally reported positive commercial real estate

(CRE) fundamentals, but leading real estate indices from CoStar,

Real Capital Analytics (RCA), Green Street and NCREIF revealed

moderating to little growth from the prior quarter for most of

FTI INSIGHTS Economic & Real Estate Report – 3rd Quarter 2017

2 · FTI Consulting, Inc. EXPERTS WITH IMPACT

the major commercial property types. Despite increasing from

the prior quarter, the growing gap between buyer and seller

pricing expectations has contributed to declining sales volume in

the last 12 months. The growth of E‐commerce continues to be a

driver of demand for industrial product, but the byproduct of

this growth is evidenced by retail bankruptcies and store closing.

Real estate debt market conditions remained favorable during

3Q17. For the third consecutive month, CMBS issuances

increased while CMBS delinquency rates declined. According to

the Mortgage Bankers Association, commercial and multi‐family

loan lending escalated from the prior quarter and year, but the

Fed reported demand for CRE loans weakened. Sustained

investor demand allowed capital raising by REITs to increase

year‐over‐year (YoY).

Summary of Key Economic Indicators

GDP Growth Accelerates. The advance estimate showed

that 3Q17 U.S. GDP increased at a 3.1% seasonally adjusted

annualized rate, up from 3.0% last quarter.

Unemployment Rate Declines. Despite job losses, the

September unemployment rate decreased 20 BPS to 4.2%

as employment gains outpaced the increase in the labor

force.

Job Openings Rise. During 3Q17, the number of job

openings increased 7.0% YoY. At the end of September,

there were about 6.1 million job openings.

Employment Cost Index (ECI) Rises. Total employment

costs, including wages and salaries, increased 0.7% during

3Q17. Wage costs have risen faster in the private sector

than in the government sector. The strengthening of

employment costs is consistent with the firming of average

hourly earnings.

Small Business Optimism Declines. According to the NFIB

Small Business Optimism Index, small business confidence

slipped in September as 6 of the 10 index components

declined. The decrease was largely driven by declines in

expected sales and the heightened concerns of small

business owners, who are focused on the uncertain impact

of the anticipated policy changes that will affect health care

and taxes.

Consumer Confidence Falls. September’s consumer

confidence, measured by the Conference Board and

University of Michigan Index, declined amidst concerns

related to Hurricanes Harvey and Irma.

Dodge Momentum Index (DMI) Plunges. Reflecting

softening non‐residential construction, September’s

institutional building component fell 11.5% and the

commercial building component declined 6.1% from the

prior month. The DMI has now fallen in four consecutive

months, driven in part by tighter lending standards and

leaner public‐sector budgets.

The Leading Economic Index (LEI) Declines. Following 12

consecutive monthly gains, the LEI dropped in September. It

is speculated that Hurricanes Harvey and Irma contributed

significantly to the 0.2% decline. The decrease was mainly

concentrated in residential construction and labor markets.

Despite the setback, the LEI trend remains consistent, with

continuing steady growth in the U.S. economy during the

second half of 2017.

Retail Sales Surge. Driven by higher gasoline prices and

rising automobile sales, retail sales grew 1.6% in

September, the largest one‐month increase since March

2015. Sales at gasoline stations increased 5.8%, as

Hurricane Harvey disrupted refinery activity and fuel

shipments, and sales at motor vehicle and auto parts

dealers rose 3.6%, as consumers sought to replace

damaged cars and trucks. Due to cleanup efforts, sales at

gardening and building material stores increased 2.1%,

representing the biggest increase since February 2017.

Consumer Inflation Rises. The headline Consumer Price

Index (CPI) increased 0.5% in September, boosted by the

13.1% rise in gasoline prices, the largest increase since June

2009. Aside from gasoline pricing, price pressure was

modest. During the past 12 months, consumer prices have

increased 2.2%; however, core inflation, which strips out

food and energy prices, held at just 1.7% for the fifth

consecutive month.

Industrial Production Rises Modestly. U.S. industrial

output increased 0.3% in September. Although 3Q17’s

industrial production fell at a 1.5% annual rate, the Fed

indicated its index would have risen at least 0.5% if not for

Hurricanes Harvey and Irma. Industrial production is still

1.6% higher YoY, as most industries ramped up production

in September, led by utilities and construction.

Durable Goods Orders Increase. Driven by a 31.5% increase

in orders for commercial aircraft, U.S. durable goods orders

increased 2.2% in September, the largest gain in three

months. Excluding transportation, new orders increased

0.7%, the same gain as reported in August.

ISM Nonmanufacturing Index Rises. The service sector

index increased in September to its highest level since

August 2005 despite the adverse impact to the supply chain

attributed to the hurricanes.



5‐Year Graphical Snapshots of Selected Economic Indicators

The following charts depict historical trends for several key economic indicators.

Effective Federal Funds Rate

Historic and Current Figures

Source: St. Louis Federal Reserve Board

Inflation ‐ All Urban Consumers – (CPI‐U)

Historic and Current Figures (YoY)


10‐Yr Treasury Rates

Historic and Current Figures


Trade Weighted U.S. Dollar Index (DTWEXB)

US Dollar Value Against Major U.S. Trading Partners


West Texas Intermediate (WTI) Crude Oil Prices

Price Per Barrel


Dow Jones and S&P 500 Averages

Historic and Current Figures (Closing Average for Day)

Source: Yahoo Finance

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

1.1%

1.2%

1.3%

Sep‐12

Jan‐13

May‐1

3

Sep‐13

Jan‐14

May‐1

4

Sep‐14

Jan‐15

May‐1

5

Sep‐15

Jan‐16

May‐1

6

Sep‐16

Jan‐17

May‐1

7

Sep‐17

Average

Dec 2015‐ 1st interest rate hike since June 2006

Dec 2016‐ 2nd 25 BPS interest rate hike ‐ rates range between 0.50 % and 0.75%

Mar 2017‐ 3rd 25 BPS interest rate hike ‐ rates range between 0.75 % and 1.00%

June 2017‐ 4th 25 BPS interest rate hike ‐ rates range between 1.00 % and 1.25%

‐0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Sep‐12

Jan‐13

May‐1

3

Sep‐13

Jan‐14

May‐1

4

Sep‐14

Jan‐15

May‐1

5

Sep‐15

Jan‐16

May‐1

6

Sep‐16

Jan‐17

May‐1

7

Sep‐17

Average

Feb 2017 ‐ Annual inflation rate at 2.7%, its highest point since Mar 2012

1.2%

1.6%

2.0%

2.4%

2.8%

3.2%

Sep‐12

Jan‐13

May‐1

3

Sep‐13

Jan‐14

May‐1

4

Sep‐14

Jan‐15

May‐1

5

Sep‐15

Jan‐16

May‐1

6

Sep‐16

Jan‐17

May‐1

7

Sep‐17

Average

July 2016‐ 10‐Yr treasury closed below 1.4% for the first time, resulting from record‐setting declines in global gov't bond yields following the U.K.’s vote to quit the European Union.

March 2017‐ 10‐Yr treasury reaches 2.62%, the highest level since Sept 2014

$95

$100

$105

$110

$115

$120

$125

$130

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15

Sep‐15

Jan‐16

May‐16

Sep‐16

Jan‐17

May‐17

Sep‐17

Average

December 2016‐ Index climbed to nearly a 14‐year high tied to bets on pro‐growth policies under President‐elect Donald Trump

September 2017‐ Index falls to lowest level since early 2015 on lower analyst expectations regarding a Federal Reserve interest rate hike later this year

March 2015‐ Index climbed more 16% during prior 9 months due to the strengthening American economy versus other parts of the world.

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

$140

$150

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15

Sep‐15

Jan‐16

May‐16

Sep‐16

Jan‐17

May‐17

Sep‐17

Average

Feburary 2016 ‐ Crude oil plunges to $26 per barrel, down 75% from June 2014, due to mounting global headwinds.

June 2014 ‐ $108 per barrel

3Q17 ‐ Since bottoming at $42.5 in June, oil prices have increased nearly $10 per barrel as of September on signs a market rebalancing is under way.

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

11,500

12,500

13,500

14,500

15,500

16,500

17,500

18,500

19,500

20,500

21,500

22,500

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15

Sep‐15

Jan‐16

May‐16

Sep‐16

Jan‐17

May‐17

Sep‐17

S&P 500DJIA

DJIA S&P 500

Average

August 2, 2017 ‐ DJIA eclipses 22,000 for the first time

September 15, 2017 ‐ S&P 500 eclipses 2,500 for the first time



Labor Market As the hurricanes delayed hiring and left workers briefly

unemployed, the U.S. economy shed 33,000 jobs in September,

which was the first monthly loss in seven years. Nearly 1.5

million workers stayed at home due to the bad weather, the

most since January 1996. Economists, who projected between

75,000 and 90,000 additional jobs, believed the employment

figures were distorted due to the storms and still see underlying

strength in the labor market. Prior to September, the U.S.

economy had added an average of 171,000 jobs per month in

2017, down from the 2016 monthly average of 186,000.

During 3Q17, job growth was mainly concentrated in the

education & health services (+123,000) and the professional and

business services (+99,000) sectors. Quarterly gains of nearly

30,000 were recorded in the manufacturing, financial activities

and trade, transportation and utilities sectors. As in the first half

of the year, the information services sector continued to shed

jobs (16,000). Due to the inclement weather, leisure and

hospitality payrolls fell by 111,000 in September, which is the

largest monthly decline on record.

According to the ADP National Employment Report, non‐farm

private sector employment increased by 135,000 in September,

the lowest monthly total since October 2016. During 3Q17, an

average 183,000 non‐farm, private jobs were added per month,

lagging the 191,000‐monthly pace of the prior quarter.

Despite the loss of jobs, the September unemployment rate

decreased 20 BPS to 4.2%, the lowest level since February 2001.

The September U‐6 rate, a broader measure of unemployment

that includes Americans in part‐time jobs or not looking for

work, decreased 30 BPS to 8.3% from August and has declined

140 BPS YoY. Annual wage growth accelerated to 2.9%, which

was the largest gain since last December; however, analysts

attribute the uptick to the displacement of lower wage workers

in hurricane impacted areas. The labor force participation rate,

lingering near the 40‐year low, rose slightly to 63.1%.

Below is a comparison of industry employment since the last

monthly decline, which was recorded 7 years ago.

U.S. Non‐Farm Employment by Industry

Historic and Current Figures (thousands)

Source: Bureau of Labor Statistics

As shown below, the unemployment rate has declined 540 BPS

since September 2010. The current unemployment rate is 250

BPS below the 6.7% average recorded between September 2010

and 2017 and has remained below 5.0% for the past 12 months.

U.S. Unemployment Rate Trends

Source: Bureau of Labor Statistics

Consumer confidence indices are considered key indicators of

economic conditions.

The Conference Board. Consumer confidence, impacted by the

hurricanes, declined slightly in September. Lynn Franco, Director

of Economic Indicators at The Conference Board, remarked,

“Despite the slight downtick in confidence, consumers’

assessment of current conditions remains quite favorable and

their expectations for the short‐term suggest the economy will

continue expanding at its current pace.” Expectations regarding

future economic conditions increased modestly, driven by a

more favorable labor market outlook and greater optimism

regarding income prospects.

University of Michigan Index. In September, consumer

sentiment fell slightly as growing optimism about current

economic conditions was offset by concerns related the financial

impacts of Hurricanes Harvey and Irma. During the first nine

months of the year, the average level of consumer sentiment

was the highest it has been since 2000. Most encouragingly,

sentiment has largely remained resilient throughout the year

despite various concerns such as escalating tensions with North

Korea, political turmoil, weather disturbances and the

Charlottesville incident.

Below are consumer confidence trends since September 2012.

Consumer Confidence Overview

Historic and Current Figures (thousands)

Source: Conference Board, University of Michigan

Sept.2017 Sept 2010 Total Percent

Employment Employment Change ChangeConstruction 6,911 5,501 1,410 25.6%Prof & Bus. Services 20,807 16,790 4,017 23.9%Leisure & Hospitality 15,873 13,137 2,736 20.8%Educ. & Health Services 23,217 20,000 3,217 16.1%Trade, Trans & Utilities 27,405 24,698 2,707 11.0%Financial Activities 8,473 7,683 790 10.3%Other Services 5,761 5,332 429 8.0%Manufacturing 12,447 11,563 884 7.6%Government 22,337 22,247 90 0.4%Information 2,707 2,697 10 0.4%Mining and Logging 721 723 (2) ‐0.3%Total Nonfarm 146,659 130,371 16,288 12.5%

Industry Sector

‐50

0

50

100

150

200

250

300

350

400

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

Sep‐10 Mar‐11 Sep‐11 Mar‐12 Sep‐12 Mar‐13 Sep‐13 Mar‐14 Sep‐14 Mar‐15 Sep‐15 Mar‐16 Sep‐16 Mar‐17 Sep‐17

Job Additions/Losses Unemployment Rate Avg Unemployment Rate

50

60

70

80

90

100

110

120

130

Sep‐12 Mar‐13 Sep‐13 Mar‐14 Sep‐14 Mar‐15 Sep‐15 Mar‐16 Sep‐16 Mar‐17 Sep‐17

Confidence Index Value

University of Michigan Conference Board

Average Sept. 2012 to Sept. 2017



Gross Domestic Product (GDP) The advance estimate of 3Q17 GDP showed that the U.S.

economy grew at a seasonally adjusted annualized rate of 3.0%

after advancing 3.1% in the prior quarter. This marked the

strongest growth in consecutive quarters in 3 years.

The storms reportedly weighed on consumer’s spending on goods

and services, which slowed to a 2.4% pace from a 3.3% gain in the

prior quarter. Still, consumer outlays contributed nearly 1.6% to

economic growth. While durable goods orders increased to 8.3%,

up from 7.6% in 2Q17, spending advances on non‐durable goods

slowed from 4.2% to 2.1%.

Growth in non‐residential fixed investment, a measure of

corporate business spending, slowed to 3.9% from 6.7% in 2Q17

and business investment decelerated to 5.2% growth after gaining

7.0% during the prior quarter. On the positive, spending on

business equipment increased 8.6%, the fourth straight quarterly

increase. Business spending on intellectual property increased

4.3%, up from 3.7%.

Spending on homebuilding and improvements was a drag on

economic performance. Residential fixed investment declined

6.0%, following a 7.3% retreat during the prior quarter.

Other 3Q17 GDP Key Trends

In anticipation of strong demand, businesses accumulated

inventories at a $35.8 billion pace. This faster inventory

rebuilding contributed 0.73% to growth.

Trade provided a boost to growth for the third straight

quarter, as U.S. exporters have been aided by faster global

growth and a weaker dollar. During 3Q17, exports increased

2.3% while imports fell 0.8%.

Overall government spending fell for the third consecutive

quarter. Outlays decreased 0.1%, driven by a 0.9% decline

in state and local government expenditures. A 2.3%

increase in national defense spending advanced federal

outlays by 1.1%.

Inflation increased as the personal consumption

expenditures index, excluding food and energy, advanced

1.5%, up from 0.3% last quarter.

The personal savings rate fell to 3.4%, the lowest in nearly

10 years. This a sign of growing confidence, as more money

poured into risk.

Disposable personal income decelerated to 2.1% growth

rate in 3Q17 compared to 3.6% in 2Q17.

The following chart summarizes U.S. GDP growth since 3Q12.

Gross Domestic Product

Quarter‐to‐Quarter Growth in Real GDP

Source: Bureau of Economic Analysis

Institute for Supply Management (ISM) Manufacturing Index Manufacturing activity escalated throughout 3Q17 as the

headline Purchaser’s Manufacturing Index (PMI) showed

American factories expanded for the 13th consecutive month in

September. Despite the hurricanes, the PMI remained resilient

and reached its highest level since May 2004. Of the 18

manufacturing industries tracked, 17 reported growth.

Almost all indicators signaled a strengthening manufacturing

sector. Consistent with improving manufacturing activity,

supplier deliveries continued to lengthen. New orders,

commonly viewed as the leading economic driver of

manufacturing growth, increased and manufacturers further

added to existing inventories to meet growing demand, resulting

in the strongest quarter for inventory building in more than two

years. In September, prices increased nearly 10.0%, reflecting

higher costs of raw materials, and manufacturers reported

increased hiring for the 12th consecutive month. Still,

manufacturers reported the potential for a short‐supply of

products and higher prices in the coming months.

As reported by the Wall Street Journal on October 2, 2017,

Timothy Fiore, head of the ISM survey, said that he expects

residual impact on the sector over the next three to six months

because of the hurricanes, but “overall, they are not going to

change the fundamental factors of demand, and in fact could

reflect increased demand because of the destruction element.”

ISM member respondents were generally mixed regarding

business conditions. Comments included:

“Business levels continue to be strong.”

“Hurricanes causing supply chain and pricing issues.”

“Business is strong; however, we are concerned about price

increases due to the hurricanes.”

‐1.0%

‐0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

Average



The graph below shows fluctuations within the PMI since

September 2013.

Purchasing Manager’s Index (PMI)

Source: Institute for Supply Management

The following summarizes key components of the ISM Index.

Purchasing Managers’ Index (PMI). A reading above 50.0%

indicates that the manufacturing economy is generally

expanding; below 50.0% indicates that it is generally

contracting. Manufacturing has expanded for 13

consecutive months. The PMI has averaged 56.2% over the

past 12 months, ranging from 52.0% to 60.8%and the

September reading was 60.8%.

New Orders Index. A New Orders Index above 52.1%, over

time, is generally consistent with an increase in the Census

Bureau's series on manufacturing orders. The index

increased 4.3% to 64.6% in September, as growth was

recorded for the 13th consecutive month.

Production Index. An index above 51.0%, over time, is

generally consistent with an increase in the Fed’s industrial

production figures. The index increased 1.2% in September

to 62.2%, marking the 13th consecutive month of growth.

Employment Index. An Employment Index above 50.6%,

over time, is generally consistent with an increase in

manufacturing employment. An increase of 0.4% in

September sent the index to 60.3%, indicating growth for

12 consecutive months.

Prices index. A Prices Index above 52.4%, over time, is

generally consistent with an increase in the BLS Producer

Price Index for Intermediate Materials. In September, an

increase of 9.5% raised the index to 71.5%. Raw materials

prices have increased for 19 straight months.

Supplier Delivery Index. A reading below 50.0% indicates

faster deliveries, while a reading above 50.0% indicates

slower deliveries. The delivery performance of suppliers

registered 64.4% in September, marking the 17th

consecutive month of slowing supplier deliveries. This

indicates that supply chains are continuing to adjust to

strong demand levels.

Construction Spending September’s construction outlays increased 0.3% unexpectedly

to a seasonally adjusted annualized rate of $1.22 trillion,

following a downwardly revised August reading. The increase

was due to the largest monthly rise in government building

activity in four months, reflecting looser federal, state and local

budgets. Private construction spending fell for the third

consecutive month, largely driven by weakness in non‐

residential outlays. It was reported that spending on oil drilling

has slowed due to price gains and ample crude supplies. Still,

3Q17’s total construction expenditures were 4.3% higher YoY.

Private Construction

Comprising 77.0% of total construction expenditures, there

was a 0.4% decline in September, but spending is up 3.1%

YoY.

Within the residential sector, spending on new, single‐

family home projects increased 11.9% YoY and increased

0.9% YoY for new multi‐family homes.

YoY, non‐residential construction spending fell 3.8%. Of

note, spending on commercial (+11.7%) and lodging (+1.1%)

projects increased, while spending on office (7.7%) and

manufacturing projects (20.5%) declined.

Public Construction

Institutional outlays increased 2.6% in September, but have

declined 1.6% YoY. Spending on residential projects

improved 5.1% in September, but is still down 3.9% YoY.

During the past 12 months, non‐residential expenditures

declined 1.6%. Of note, spending on office and commercial

projects increased 4.0% and 3.3%, respectively.

The following chart highlights annualized residential and non‐

residential construction outlays since September 2012. Since

2016, the variance has tightened.

U.S. Construction Spending

Value of Construction (Seasonally Adjusted Annual Rate)

Source: U.S. Census Bureau

47%

48%

49%

50%

51%

52%

53%

54%

55%

56%

57%

58%

59%

60%

61%

Sep‐13

Dec‐1

3

Mar‐1

4

Jun‐14

Sep‐14

Dec‐1

4

Mar‐1

5

Jun‐15

Sep‐15

Dec‐1

5

Mar‐1

6

Jun‐16

Sep‐16

Dec‐1

6

Mar‐1

7

Jun‐17

Sep‐17

Above 50% indicates expansion in the manufacturing sector

Sept 2013 to Sept 2017 Average

$150

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Sep‐12

Dec‐1

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Mar‐1

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Jun‐13

Sep‐13

Dec‐1

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Mar‐1

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Sep‐14

Dec‐1

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Mar‐1

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Dec‐1

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Mar‐1

6

Jun‐16

Sep‐16

Dec‐1

6

Mar‐1

7

Jun‐17

Sep‐17

($ Billions)

Residential Nonresidential Variance



The Architecture Billings Index (ABI)

The Architecture Billings Index (ABI) is a diffusion index derived

from the monthly Work‐on‐the‐Boards survey, conducted by the

American Institute of Architects (AIA) Economics & Market

Research Group. The ABI is a leading economic indicator of non‐

residential construction activity, reflecting an approximate nine

to twelve‐month lag time between architecture billings and

construction spending. Any measure below 50 indicates a

decline in firm billings from the prior month and a score above

50 indicates an increase in firm billings from the prior month.

Following seven consecutive months of increased billings,

demand for design services fell in September. The ABI

declined 4.6 points to 49.1. During 3Q17, the ABI averaged

51.6, down slightly from the prior quarter.

Although both indices fell, new design contracts and project

inquiries reflected positive readings in September,

suggesting that design activity will continue to expand for

the foreseeable future.

In September, business conditions were favorable in all

parts of the U.S. except the West (48.4), where less than

half of the survey respondents reported increased billings.

Firms in the Northeast (56.9) and South (54.0) reported the

strongest monthly growth, while growth in the Midwest

(50.4) declined to its lowest level since March.

In September, billings growth was strongest in the

commercial/industrial sector (54.0), while business

conditions remained favorable for firms with a mixed

practice (52.2), institutional (51.0) and multi‐family

residential (51.0) focus.

AIA Chief Economist, Kermit Baker, Hon. AIA, PhD stated,

“We’ve seen unexpectedly strong numbers in design

activity for most of 2017, so the pause in September should

be viewed in that context.”

The following graph shows fluctuations within the ABI on a

national level and by U.S. region since September 2016.

Architectural Billings Index (ABI)

Source: The American Institute of Architects

State of the Housing Market A strengthening economy, favorable interest rates, gains in

disposable income and strong buyer interest continue to support

strong demand for housing, resulting in limited supply, rising

home prices and an unbalanced U.S. housing market. Following

three straight monthly declines, the National Association of

Realtors (NAR) reported that existing home sales increased 0.7%

in September. Still, existing home sales were down 1.5% YoY,

which was primarily caused by prevailing supply shortages,

specifically at the lower‐end of the market, and greater

affordability issues. Inventory is being constrained by rising

construction and lot development costs and the acquisition of

many homes, earlier in the recovery process, by institutional

buyers seeking to create single‐family rental platforms.

Lawrence Yun, NAR Chief Economist, stated, “Home sales in

recent months remain at their lowest level of the year and are

unable to break through, despite considerable buyer interest in

most parts of the country.”

Below are several key points pertaining to the housing market.

Median existing home prices increased 4.2%, which marked

the 67th consecutive month of YoY price gains. Low

mortgage rates and a growing economy continue to support

home pricing.

According to Freddie Mac, the average commitment rate

for a 30‐year, conventional, fixed‐rate mortgage decreased

to 3.81% in September, which represented the lowest level

since November 2016 (3.77%).

According to ATTOM Data Solutions, foreclosure filings

declined 35.0% YoY in 3Q17 to the lowest level since 2Q06.

The NAR reported that distressed sales comprised 4.0% of

total September sales, unchanged from a year earlier.

Driven by steady sales and a limited supply, the August

2017 S&P/CoreLogic Case‐Shiller U.S. National Home Price

Index reported a 6.1% annual gain, with all 20 tracked cities

increasing YoY.

In September, new home sales surged to a seasonally

adjusted annual rate of 667,000, the highest level in almost

10 years. The 18.9% monthly increase was the largest since

1992. Of concern, builders reported a shortage of workers

and materials, which could limit future construction. Year‐

to‐date, new home sales have increased 8.6%.

The CoreLogic Home Price Index reported that U.S. home

prices increased 0.9% in September and rose 7.0% YoY.

Metro areas reporting the strongest YoY growth include Las

Vegas Denver, San Diego, Los Angeles and Boston. 46

47

48

49

50

51

52

53

54

55

56

57

58

Sep‐16

Oct‐1

6

Nov‐1

6

Dec‐1

6

Jan‐17

Feb‐17

Mar‐17

Apr‐1

7

May‐1

7

Jun‐17

Jul‐1

7

Aug‐1

7

Sep‐17

(ABI Index Value)

National Billings Northeast Midwest South West



Below is a breakdown of single‐ vs. multi‐family housing starts

since September 2007.

Housing Starts

Source: U.S. Census Bureau

Housing Starts

Due to construction delays, material and labor shortages,

housing starts decreased for the fifth time in six months in

September. Starts declined 4.7% from the prior month to a

seasonally adjusted annual rate of 1.12 million units. This

represents the lowest level since September 2016. Despite

the latest fall, housing starts are 6.1% higher YoY.

In the South, groundbreaking decreased 9.3% to the lowest

level since October 2015, with single‐family homebuilding in

the region sinking 15.3%

September’s single‐family housing starts declined 4.6%, but

are up 5.9% YoY. Still, industry experts have stated that

more construction is needed to satisfy pent‐up demand.

Multi‐family housing starts fell 6.2% from the prior month.

Still, but YoY starts are up nearly 8.0%.

Building Permits

Building permit activity decreased 4.5% in September to a

1.22 million‐unit rate and were 4.3% higher YoY.

Single‐family permits improved 2.4% from the prior month

and activity is up 9.3% YoY. Multi‐family permits fell 17.4%

in September and are down 25.3% YoY.

Builder Confidence

Builder confidence in the market for newly‐built, single‐family

homes fell slightly in September as the hurricanes caused

extensive damage in Texas and Florida, two states where U.S.

single‐family permit activity is among the highest. NAHB

Chairman Granger MacDonald remarked, “The recent hurricanes

have intensified our members’ concerns about the availability of

labor and the cost of building materials. Once the rebuilding

process is underway, I expect builder confidence will return to

the high levels we saw this spring.” All three index components

(sales expectations, buyer traffic and current sales conditions)

recorded losses in September, but remain at historically healthy

levels. Looking at the three‐month moving averages for regional

housing market index scores, developers remained most

confident in the West followed by the South, Midwest and

Northeast regions.

The following is a historical chart comparing the NAHB/Wells

Fargo Housing Market Index and single‐family starts.

NAHB/Wells Fargo Housing Market Index

Source: NAHB/Wells Fargo; U.S. Census Bureau

Housing Sales and Inventory

Below are key housing market statistics as of September 2017.

YoY existing home sales were unchanged in the West, but

fell 2.3% in the South, declined 1.5% in the Midwest and

were off 1.4% in the Northeast.

YoY, the median price of an existing home increased 5.4% in

the Midwest, followed by gains of 5.0% in the West, 4.8% in

the Northeast and 4.6% in the South.

Total inventory of existing homes fell 6.7% YoY and has

fallen YoY for 28 consecutive months. In September,

existing inventory represented a 4.2‐month supply.

Below is a breakdown of existing annualized housing sales vs.

supply since September 2017.

Housing Sales

Existing Annualized Housing Sales vs. Monthly Supply

Source: National Association of Realtors

0

100

200

300

400

500

600

700

800

900

1,000

Sep‐07

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

Sep‐13

Mar‐14

Sep‐14

Mar‐15

Sep‐15

Mar‐16

Sep‐16

Mar‐17

Sep‐17

Thousands of units

Single‐Family Housing Starts Multi‐Family Housing Starts

Average annualized total housing starts per year

0

100

200

300

400

500

600

700

800

900

1,000

0

10

20

30

40

50

60

70

80

90

100

Sep‐07

Mar‐0

8

Sep‐08

Mar‐0

9

Sep‐09

Mar‐1

0

Sep‐10

Mar‐1

1

Sep‐11

Mar‐1

2

Sep‐12

Mar‐1

3

Sep‐13

Mar‐1

4

Sep‐14

Mar‐1

5

Sep‐15

Mar‐1

6

Sep‐16

Mar‐1

7

Sep‐17

Housing StartsHousing Market Index

Housing Market Index Single‐Family Starts

3.2

3.6

4.0

4.4

4.8

5.2

5.6

4,600,000

4,800,000

5,000,000

5,200,000

5,400,000

5,600,000

5,800,000

Sep‐14

Nov‐1

4

Jan‐15

Mar‐1

5

May‐1

5

Jul‐1

5

Sep‐15

Nov‐1

5

Jan‐16

Mar‐1

6

May‐1

6

Jul‐1

6

Sep‐16

Nov‐1

6

Jan‐17

Mar‐1

7

May‐1

7

Jul‐1

7

Sep‐17

Months SupplyAnnualized Housing Sales

Existing Annualized Home Sales Avg Home Sales Months Supply Avg Months Supply



PwC Real Estate Investor Survey Institutional and private investors surveyed for the 3Q17

PwC Real Estate Investor Survey reported that overall cap

rates (OARs) decreased in 18, increased in 9 and held steady

in 8 of the survey’s 35 tracked markets compared to 2Q17.

Collectively, OAR’s increased recorded no change across the

major property types since 2Q17.

Terminal cap rates decreased 2 BPS to 6.60% in 3Q17 and

have moved little during the past several quarters.

Discount rates (IRRs) recorded no change and remained at

7.44% in 3Q17 and have fallen 4 BPS YoY.

3Q17 Survey Highlights

OARs decreased by less than 10 BPS within four of the

major property sectors, led by declines within the strip

center, apartment and warehouse sectors. The power

center and suburban office sectors recorded 5 BPS

increases and no change was recorded within the flex/R&D

sector.

As of 3Q17, the warehouse and apartment sectors had the

lowest OAR’s at around 5.3%. Flex/R&D properties had the

highest average OARs at just over 7.0%, followed by the

suburban office and power center sectors. The simple

average across all sectors was 6.11%.

Terminal capitalization rates decreased within four of the

major commercial property sectors, including a 12 BPS fall

in the power center sector. The strip center sector recorded

a 7 BPS increase and small movement upwards of 3 BPS was

recorded in the other sectors.

As of 3Q17, the apartment and warehouse sectors had the

lowest terminal capitalization rates. Suburban office assets

had the highest terminal capitalization rate and the simple

average across all sectors was 6.60%.

IRRs decreased from the prior quarter in three of the major

commercial property sectors during 3Q17. The largest

decrease was recorded in the power center (7 BPS) sector.

The largest increases were recorded in the CBD‐office (8

BPS) and suburban office sectors (6 BPS) and no changes

were recorded in the flex/R&D, apartment and regional

mall sectors.

As of 3Q17, warehouse properties had the lowest IRRs,

followed by the CBD‐office sector. The highest IRR’s were

recorded within the flex/R&D and suburban office sectors

and the simple average across all sectors was 7.44%.

Simple averages of overall capitalization, terminal capitalization

and discount rates are presented in the following table. The

averages reflect the following property types: industrial

(flex/R&D, warehouse), office (central business district (CBD)

office, suburban office), apartment and retail (strip center,

regional malls and power centers).

PwC Real Estate Investor Survey Historical Results

Investment Rate Analysis

Additional 3Q17 Report Insights/Findings

In the search for greater yield and diversity within their

portfolios, coupled with uncertainty of continued growth in

pricing, more survey participants reported looking at non‐

core, less traditional CRE such as medical office buildings,

self‐storage and student housing.

Most survey participants predict little movement in overall

capitalization rates during the next several months.

The following graph shows capitalization rates for the ten

largest office markets between 3Q14 and 3Q17.

During the past three‐year period, the Dallas, Seattle,

Philadelphia, Chicago and Atlanta markets recorded declines

between 60 and 66 BPS. Following a large decrease in 3Q15,

capitalization rates have since increased 44 BPS in Houston.

Modest declines were recorded in the two largest markets,

Manhattan and Washington D.C.

PwC Real Estate Investor Survey Historical Results

Office Capitalization Rates

6.00%

6.25%

6.50%

6.75%

7.00%

7.25%

7.50%

7.75%

8.00%

8.25%

8.50%

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

Terminal Cap Rate Discount Rate Overall Cap Rate

average discount rate

average cap rate

average terminal cap rate

4.75% 5.00% 5.25% 5.50% 5.75% 6.00% 6.25% 6.50% 6.75% 7.00% 7.25% 7.50% 7.75% 8.00%

Houston

Philadelphia

Chicago

Atlanta

Dallas

Boston

Seattle

Los Angeles

Wash DC

Manhattan

3Q17 3Q16 3Q15 3Q14



PwC Real Estate Barometer

The PwC Real Estate Barometer was introduced as a system

for analyzing historical/forecasted CRE data within the four

major U.S. property sectors. The barometer indicates where a

major property type is positioned within the real estate cycle,

which consists of the following four phases: contraction,

recession, recovery and expansion.

Nearly half of the tracked office markets were in the

expansion phase of the real estate cycle as of 3Q17, the

highest among the major sectors. PwC’s forecasts show

that 2017 will be the peak for fundamentals in this cycle,

as most markets are projected to move into the

contraction phase by 2018 due to increasing new supply

and anticipated slower tenant demand.

Nearly 45.0% of the tracked retail markets are in the

contraction phase of the real estate cycle as of 3Q17,

which is considerably higher YoY. Softening conditions,

fueled by store closings and retail bankruptcies,

continued to shrink brick and mortar footprints.

Currently, just 13.0% of the markets are in the expansion

phase.

Despite healthy market fundamentals, nearly 65.0% of

the tracked industrial markets are in the contraction

phase, as new supply in the near term is projected to

place downward pressure on rental rates. On the

positive, no tracked markets were in the recession phase.

Like last quarter, almost 70.0% of U.S. multi‐family

markets are in the contraction phase, primarily resulting

from new supply additions having outpaced demand.

Due to the slower than anticipated absorption of units,

PwC’s forecasts show that most of markets will likely not

be in the expansion phase until at least 2019.

Below is a snapshot of each major property type as of 3Q17.

Source: PwC

RCA Commercial Property Price Index (CPPI) The RCA Commercial Property Price Index (CPPI) is a periodic

same‐property investment price change index of the U.S.

commercial investment market based on Real Capital Analytics

(RCA) data. RCA collects price information for every commercial

property transaction in the U.S. that is over $2,500,000. The

index tracks same‐property realized round‐trip price changes

based purely on the documented prices in completed,

contemporary property transactions. The methodology is an

extension of market‐accepted regression‐based, repeat‐sales

indices and uses no appraisal valuations.

Below are changes within the major RCA commercial property

indices since September 2007.

RCA Commercial Property Price Index

National All Property vs. Apartment vs. Core Commercial Index

The National All‐Property Composite Index (the “Index”)

increased 3.1% during 3Q17, including a 1.0% gain in

September. Growth was stronger within the apartment

sector, which gained 3.6% during the quarter versus a 1.6%

increase within the core commercial sector.

Within the core commercial sectors, pricing within the

suburban office sector increased 1.8% during 3Q17,

eclipsing gains of 1.5% within the CBD office and industrial

sectors. Pricing within the retail sector recorded a 0.3%

gain.

Price appreciation was stronger in non‐major markets

(+3.0%) than in major markets (+2.4%) during 3Q17.

During the past 12 months, the apartment sector was the

top performing sector, as pricing increased 10.0%. This

represented an increase of 250 BPS over the Index gain.

The retail sector posted a yearly gain of 0.8%, considerably

lower than the other sectors, due to the growing presence

of online retailers and store closures/downsizings.

Pricing increased faster within major markets (+8.3%) than

in non‐major markets (+7.1%) during the past 12 months.

49%

9%7%

35%

Office

Expansion Recovery

Recession Contraction

34%

2%

64%

Industrial

Expansion Recovery Contraction

12% 3%

17%

68%

Multi‐Family

Expansion Recovery


12%

30%44%

14%

Expansion Recovery


Retail

60

70

80

90

100

110

120

130

140

150

160

Sep‐07

Jan‐08

May‐08

Sep‐08

Jan‐09

May‐09

Sep‐09

Jan‐10

May‐10

Sep‐10

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15

Sep‐15

Jan‐16

May‐16

Sep‐16

Jan‐17

May‐17

Sep‐17

National All‐Property Apartment Core Commercial

Apartment Index Avg

National All‐Property Index Avg

Core Commercial Index Avg



The following chart illustrates cumulative price returns for the

primary sectors in the CPPI from one month to ten years.

Green Street Commercial Property Price Index Green Street’s Commercial Property Price Index is a time series

of unleveraged U.S. commercial property values that captures

the prices at which CRE transactions are currently being

negotiated and contracted. Features that differentiate this index

are its timeliness, emphasis on institutional quality properties,

and ability to capture changes in the aggregate value of the

commercial property sector.

The Green Street Commercial Property Price index reflected

slowing price appreciation during the past several quarters.

During the past year, the index has flattened out, as growing

income has been offset by higher capitalization rates.

Peter Rothemund, Senior Analyst at Green Street Advisors,

stated, “Some properties have been stronger, but when you

measure it in aggregate, commercial property values are at

about the same level they were this time last year. Industrial,

medical office and life science have been the big winners over

the past year — values are up by double‐digit percentages. Retail

has been weakest.”

During 3Q17, the industrial and apartment sectors realized

pricing gains of 2.0%, the highest among the sectors. Pricing

increased 1.0% within the mall and strip retail sectors and no

change was recorded within the office sector.

During the past 12‐months, pricing in the industrial sector

increased 10.0% followed by a 3.0% gain in the office sector.

Price declines ranging between 5.0% and 6.0% were recorded in

the mall and strip center sectors and little change occurred in

the lodging and apartment sectors.

Below are changes since September 2005.

Green Street Commercial Property Price Index

National Index – All Properties

Commercial Property Sales Analysis Investment sale activity escalated slightly during the summer

months from the pace set during the first half of 2017; however,

this marked the fourth consecutive quarter of declining YoY

activity. RCA reported that commercial property sales volume

totaled nearly 110.0 billion (excluding land) during 3Q17, a

decrease of almost 10.0% YoY. The report noted that high pricing

has made underwriting acquisitions more difficult. A widening

gap between buyer and seller pricing expectations has slowed

volume as buyers are exhibiting more caution and current

owners are reportedly not as motivated to sell as in the last

cycle. Sales activity since 2016 registered approximately $318

billion, lagging the YoY output by 7.0%.

As investors continue to look toward secondary and tertiary

markets in search of greater returns, more deal activity has been

executed in these areas. RCA noted that Los Angeles continues

to be the largest commercial investment market in terms of

volume, followed by Dallas, Manhattan, Chicago and Atlanta.

2014 to 3Q17 sales activity by property type is summarized

below.

Investment Sales Activity

Dollar Value of Sales Transactions by Property Type

Source: Real Capital Analytics (2017 activity is annualized based on 3Q17 data)

Index1

Month

3

Months

1

Year

3

Years

5

Years

10

Years

Apartment 1.1% 3.6% 10.0% 41.1% 75.7% 53.8%

Core Commercial 0.5% 1.6% 4.9% 22.8% 52.8% 2.4%

Industrial 0.5% 1.5% 8.2% 28.3% 57.1% 10.4%

Office 0.6% 2.0% 5.1% 23.8% 55.0% 2.2%

CBD 0.5% 1.5% 5.2% 29.0% 68.9% 36.0%

Suburban 0.4% 1.8% 5.5% 24.3% 54.3% ‐3.2%

Retail 0.1% 0.3% 0.8% 15.3% 43.6% ‐3.7%

Major Markets 0.8% 2.4% 8.3% 31.6% 67.5% 36.9%

Non‐Major Markets 1.0% 3.0% 7.1% 31.0% 61.5% 12.4%

National All‐Property 1.0% 3.1% 7.5% 31.2% 62.7% 20.4%

RCA CPPI

Cumulative Returns by Sector/Type

100 - Aug 2007

61.7 - June 2009

55

65

75

85

95

105

115

125

135

Sep-05

Mar-0

6

Sep-06

Mar-0

7

Sep-07

Mar-0

8

Sep-08

Mar-0

9

Sep-09

Mar-1

0

Sep-10

Mar-1

1

Sep-11

Mar-1

2

Sep-12

Mar-1

3

Sep-13

Mar-1

4

Sep-14

Mar-1

5

Sep-15

Mar-1

6

Sep-16

Mar-1

7

Sep-17

126.9- Sept. 2017

Sept. 2005 to Sept. 2017 Average

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

Apartment Retail Office Industrial Hotel

(millions)

2014 Dollar Volume 2015 Dollar Volume 2016 Dollar Volume 2017 Dollar Volume



Below we look at sales activity, per RCA, by product type.

Apartment. Investment sales volume increased to $40.0

billion in 3Q17, a 5.0% YoY increase. Driving activity,

portfolio and entity‐level transactions grew 63.0% YoY;

however, through the first three quarters of 2017, sales

volume is down 9.0% YoY. Volume declines were similar for

garden apartment and mid/high‐rise transactions. Investors

were increasingly drawn to secondary and tertiary areas,

where more than 70.0% of deal volume was transacted.

Highlighting activity, Greystar Real Estate Partners acquired

Monogram Residential Trust Inc. and its 13,500 U.S.

apartment units for about $3.0 billion. Annualized, sales

volume is projected to decline 12.0% from last year.

Retail. Sales weakened during the summer months and

totaled about $13.3 billion during 3Q17, a 32.0% YoY

decrease. Through the first three quarters of 2017, volume

is 19.0% lower YoY. Driving the decline was a 30% fall in

portfolio and entity‐level transactions. During this period,

investment activity in the centers sector (retail space

consisting of multiple tenants and 30,000 square feet or

more) fell 25.0% as compared to a 7.0% decline in the shops

sector (retail space usually occupied by a single tenant

and/or under 30,000 square feet). Among the retail

subtypes, sales of single‐tenant properties and grocery‐

anchored centers improved 22.0% and 21.0% YoY,

respectively, in contrast to declines of 82.0% and 27.0% for

regional mall and urban/storefront properties. Annualized,

sales volume is projected to decrease 19.0% from YoY.

Office. Investors continued to favor suburban offices,

where pricing is more favorable. Office sales fell 18.0% YoY

to $29.0 billion in 3Q17, driven by a 49.0% decrease in CBD

office sales. Through the first three quarters of 2017, YoY

sales volume was 6.5% lower. During this period,

investment activity increased nearly 9.0% YoY in the

suburbs, where nearly 65.0% of all sales were transacted,

and declined nearly 25.0% YoY in CBD markets. The medical

office subsector recorded a 35.0% YoY increase in deal

volume, driven by the Healthcare Trust of America Inc.

acquisition of Duke Realty for an estimated $2.8 billion.

Annualized, sales volume is projected to decline 12.0% YoY.

Industrial. Among the major property types, investor

demand remained strongest for industrial assets during

3Q17. During the quarter, transaction volume totaled about

$20.5 billion, a 36.0% YoY increase. This increase was driven

by a 118.0% and 48.0% YoY increases in portfolio and

entity‐level transactions and warehouse transactions. Since

2016, sales volume is up 23.0% YoY, making this the only

major property sector to record a YoY increase. Volume

increased 28.0% for warehouse properties, driven by the

growing needs of users and investors for fulfillment centers.

Annualized, sales volume is projected to increase 15.0%

YoY.

Hotel. Deal volume was sluggish during the summer

months, as about $7.3 billion of investment sales were

executed, which is down 45.0% YoY. Portfolio and entity‐

level sales volume fell 76.0% YoY and a 10.0% YoY decline

was recorded for single assets. Since 2016, volume has

lagged totals by 20.0% YoY. During the first three quarters

of 2017, full‐service hotels, comprising 62.0% of volume,

recorded a 33.0% YoY decrease in sales volume versus a

17.0% increase for limited‐service hotel assets. Nearly

70.0% of sales volume was executed in secondary and

tertiary markets. Annualized, sales volume is projected to

fall 21.0% YoY.

Below are the top buyers of commercial real estate, per RCA,

during the first three quarters of 2017.

Below are the top sellers of commercial real estate, per RCA,

during the first three quarters of 2017.

Office Industrial Retail

HNA Group Digital Realty Regency Centers

HTA (REIT) DRA Advisors Madison International

CBRE Global Investors Gramercy InvenTrust

Blackstone Blackstone CBRE Global Investors

GIC Medina Capital TIAA

Digital Realty BC Partners Federal Realty

Rockpoint Group Duke Realty Realty Income Corp.

Apartment Hotel Overall

GIC RLJ Lodging Trust GIC

Greystar AHIP REIT Blackstone

Starwood Capital Hospitality Props Trust Regency Centers

APG Group Carey Watermark 2 Digitial Realty

Blackstone Commerz Real Starwood Capital

CPP Investment Board Summit Hotel Properties Greystar

Scion Group Host Hotels & Resorts CBRE Global Investors

Top Buyers (Largest to Smallest)

YTD 2017 (by Investment Volume)

Office Industrial Retail

Beacon Capital Partners TPG Capital Equity One (REIT)

Clarion Partners TA Realty DDR

Blackstone CenturyLink Retail Props of America

Duke Realty Cabot Properties Sears Holding corp

Brookfield AM Blackstone Macy's

NYSTRS Principal Financial Blackstone

Morgan Stanley DRA Advisors Vestar Development


Monogram Res Trust FelCor Lodging Blackstone

Milestone APTS REIT Blackstone Equity One (REIT)

Starwood Capital Marriott Beacon Capital Partners

JP Morgan MCR Development Monogram Res Trust

Investors Management LaSalle Hotel Props Clarion Partners

Blackstone DiNapoli Cap Prtnrs Milestone APTS REIT

PGIM Real Estate Highgate Holdings Brookfield AM

Top Sellers (Largest to Smallest)

YTD 2017 (by Investment Volume)



In addition to the preceding data, we have also analyzed RCA

historical sales activity by buyer type.

Private buyers continued as the most active buyers of real

estate during 3Q17, acquiring $57 billion of CRE assets. This

represented half of total transaction volume. During the

first three quarters of 2017, volume registered $164 billion,

slightly off the pace of $230 billion recorded last year.

Acquisition volume by institutional/equity buyers totaled

nearly $25 billion during 3Q17. Through the first three

quarters of 2017, their market share represented 22.0% of

total volume in comparison to 26.0% last year.

International investment in U.S. CRE totaled about $37

billion since 2016, accounting for 11.0% of total sales

volume, down slightly from last year.

Investment volume totaled nearly $38 billion during the

first three quarters of 2017 for listed funds/REITs. In 2016, it

was estimated that $40 billion in acquisitions occurred.

3Q13 to 3Q17 sales activity by buyer type is summarized below.

Investment Sales Activity

Summary of Transactions by Buyer

Source: Real Capital Analytics

Below are the top metropolitan areas for sales activity per RCA.

Significant 3Q17 Sales Transactions

The following tables summarize noteworthy sales executed

during 3Q17 in the major CRE sectors per CoStar.

NCREIF Property Index The NCREIF (National Council of Real Estate Investment

Fiduciaries) Property Index (NPI) is a quarterly time series

composite total rate of return measure of investment

performance of individual CRE properties acquired in the private

market for investment purposes only. Properties in the NPI are

accounted for using market value accounting standards. NCREIF

requires that properties included in the NPI be valued at least

quarterly using standard CRE appraisal methodology. Each

property must be independently appraised a minimum of once

every three years. The capital value component of return is

predominately the product of property appraisals. When

entering the NPI, properties must be 60.0% occupied;

investment returns are reported on a non‐leveraged basis and

properties must be owned/controlled by a qualified tax‐exempt

institutional investor or its designated agent.

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

$140

$150

$160

$170

3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

($ Billions)

Crossborder Inst'l/Equity Fund Listed Funds/REITs Private User/other Unknown

Office Industrial/Flex/R&D Retail

Manhattan Los Angeles Los Angeles

Los Angeles Chicago Chicago

Boston Dallas Manhattan

San Jose DC VA Suburbs Dallas

San Francisco Inland Empire Miami/Dade Co


Dallas Los Angeles Los Angeles

Los Angeles Atlanta Dallas

Atlanta Manhattan Manhattan

Denver Hawaii Chicago

Austin Dallas Atlanta

Top Metro Areas

YTD 2017 Investment Volume (Total $)

Address/Name City, State Size (SF)Sale Price

($ mil)Buyer(s)

222 2nd Street San Francisco, CA 452,418 $542.9 Tishman Speyer

1101 New York Avenue NW Washington DC 385,000 $389.3 Oxford Properties Group

300 E Street SW Washington DC 605,897 $359.6 Hana Asset Management

1500 Market Street (2) Philadelphia, PA 1,759,193 $328.0 Nightingale Properties LLC

350 10th Avenue San Diego, CA 313,103 $207.0 DivcoWest

1111 19th Street NW Washington DC 271,369 $203.0 Unizo Holdings Company, Limited

9665 Wilshire Boulevard Beverly Hills, CA 171,114 $177.0 Douglas Emmett, Inc.


($ mil)Buyer(s)

Port Union Commerce Park (4) Fairfield, OH 1,646,914 $102.1 Clarion Partners

3000 AM Drive Quakertown, PA 935,540 $74.3 WPT Industrial REIT

Fairfield Industrial Portfolio (11) Fairfield, NJ 1,296,494 $76.1 Blackstone Real Estate Income Trust, Inc.

490 Westridge Pky ‐ Interstate S. #5 McDonough, GA 900,640 $66.7 Lexington Realty Trust

2357 South Wood Street‐ Building 1 Chicago, IL 227,043 $61.9 Gramercy Property Trust, Inc.

6207 Cajon Boulevard San Bernardino, CA 830,750 $60.2 Westcore Properties

3300 NW 123rd St ‐ Winn‐Dixie Logistics Miami, FL 961,345 $59.0 CenterPoint Properties


($ mil)Buyer(s)

Jantzen Beach Center (11) Portland, OR 732,542 $131.8 Kimco Realty Corporation

The Parke (7) Cedar Park, TX 404,419 $112.3 InvenTrust Properties

Mall at Mill Creek (2) Secaucus, NJ 312,457 $76.0 New York Life Real Estate Investors

Montecito Marketplace (11) Las Vegas, NV 198,602 $63.6 Jones Lang LaSalle Income Prop.Trust

The Shoppes at English Village North Wales, PA 103,188 $57.0 MetLife Real Estate

Dorman Center Spartanburg, SC 230,122 $46.0 Slate Retail REIT

Hickory Ridge Shopping Center (3) Hickory, NC 380,487 $44.0 Acadia Realty Trust

Name City, State UnitsSale Price

($ mil)Buyer(s)

Coast at Lakeshore East Chicago, IL 515 $222.5 Morguard North American Res. REIT

Quail Ridge Apartments Plainsboro, NJ 1,032 $190.0 Kushner Companies

Harborview at the Navy Yard Charlestown, MA 224 $149.3 John Hancock Real Estate

Shirlington Village Arlington, VA 404 $144.0 Waterton Associates LLC

Olympus Corsair San Diego, CA 360 $136.5 Olympus Property

The Manor at CityPlace Doral Doral, FL 398 $135.0 TA Realty

360 Residences San Jose, CA 213 $133.5 Essex Property Trust, Inc.

Name City, State RoomsSale Price

($ mil)Buyer(s)

The Jeremy West Hollywood Los Angeles, CA 286 $283.0 Starwood Capital Group

Bacara Resort & Spa Goleta, CA 358 $243.9 Carey Watermark Investors 1, Inc.

Doubletree Guest Suites Times Square New York, NY 468 $200.0 Fortress Investment Group LLC

Mauna Lani Bay Hotel Kamuela, HI 348 $195.7 ProspectHill Group

Oceans Edge Hotel & Marina Key West, FL 175 $175.0 Sunstone Hotel Investors, Inc.

Hyatt Regency Jacksonville Riverfront Jacksonville, FL 951 $120.0 Westmont Hospitality Group

Hamilton Hotel DC Washington DC 318 $106.5 EOS Investors, LLC

Hospitality Sale Transactions

Office Sale Transactions

Industrial/Flex/Data Center Sale Transactions

Retail Sale Transactions

Multi‐Family Sale Transactions



NPI General Recap

Although gains remain modest, NPI total returns increased

5 BPS from last quarter. The NPI total return was 1.70%,

comprised of a 1.14% income return and a 0.56% capital

appreciation return. For comparison, total returns

registered 1.77% (1.16% income return and a 0.61% capital

appreciation return) during 3Q16.

Total one‐year returns registered 6.9%, 230 BPS lower YoY.

As the real estate cycle has matured, income continues to

comprise a high percentage of total returns.

Despite modest growth, it was reported that overall market

fundamentals remained favorable during 3Q17.

Occupancy rates (93.3%) held steady at a 16‐year

high for NCREIF‐tracked properties. Industrial

assets had the highest occupancy (96.1%),

followed by apartment (93.5%), retail (93.1%) and

office (88.6%) assets.

Trailing year NOI growth of 5.1% was recorded

during 3Q17, led by gains of 8.4% and 7.9% in the

industrial and office sectors. Retail and apartment

NOI growth lagged the overall average with gains

of 3.8% and 0.8%, respectively.

NPI Annualized Returns by Region

The West and South regions had the greatest returns

(2.2% and 1.6%, respectively) during 3Q17. One‐year

returns have been strongest in the West at 8.8%, which

was 200 BPS higher than the South.

Property gains continue to lag in the East. The region’s

one‐year returns of 5.1% trailed the broader index by 180

BPS. Returns of nearly 1.3% were realized during 3Q17.

Quarter over Quarter (QoQ) gains in the Midwest

increased slightly in 3Q17 and the region returned 5.5%

during the past year.

Below is a graph illustrating total returns by region since 2012.

Returns for 2017 are annualized based on data through 3Q17.

NCREIF: Regional Total Returns

NPI Annualized Returns by Property Type

Spreads between the best and worst performing asset

types registered about 209 BPS (3.29% vs. 1.20%), higher

than the 162 BPS spread (3.07% vs. 1.45%) last quarter.

Like the prior quarter and year, the industrial sector

recorded the strongest price appreciation with a 3.3%

return during 3Q17. The one‐year return of 12.8%

outpaced all other property types by at least 660 BPS.

Growth within the retail sector fell 32 BPS from the prior

quarter to 1.2%. The 6.1% one‐year return lagged the

11.0% annual return posted in 3Q16.

Within the apartment sector, a 1.7% return was recorded

during 3Q17, which was 21 BPS higher than the prior

quarter. The one‐year return of 6.2% is 230 BPS lower

than the annual return as of 3Q16.

Returns within the office sector were 1.4% during 3Q17,

about 20 BPS lower than the prior quarter. The one‐year

return of 5.7% lagged the 7.5% annual return recorded in

3Q16.

Returns strengthened within the hotel sector during

3Q17, rising 54 BPS from the prior quarter to 2.3%. This

asset class had the strongest income return for the

quarter at 2.2%, but recorded its seventh consecutive

quarter of depreciation. The one‐year return of 4.6%

lagged the total index average by 230 BPS.

Below is a graph showing total returns by property type since

2012. Returns for 2017 are annualized based on data through

3Q17.

NCREIF: Property Type Total Returns

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

2012 2013 2014 2015 2016 2017

South West Midwest East National

Property Type Region

Office 36.8% West 38.5%

Apartment 24.1% East 33.2%

Retail 23.7% South 19.8%

Industrial 14.6% Midwest 8.5%

Hotel 0.8%

NCREIF Composition by Market Value

‐1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

2012 2013 2014 2015 2016 2017

Apartment Industrial Office Retail Hotel Total Return



Equity REIT Analysis

FTSE National Association of REITs U.S. Real

Estate Index

Comprised of 169 REITs, the Financial Times of London and

London Stock Exchange (FTSE) NAREIT All Equity REITs Index

(“The Index”) gained 1.1% during 3Q17, following a 4.9% return

during the first half of 2017. Year‐to‐date (YTD), the Index has

increased 6.0%, down from the 12.3% increase in 3Q16. During

September, the Index dropped 0.6%, as analysts attributed the

decline to concerns regarding proposed interest rate hikes, the

economy and the length of the current real estate cycle.

As reported by reit.com on October 6, 2017, Brad Case, SVP for

research at NAREIT, observes that REITs have been undervalued

for most of 2017, overall fundamentals for REITs remain healthy

and conditions are quite favorable for real estate investing and

specifically for REITs.

Below is a brief overview of selected CRE sector performance.

Investors were again bullish on industrial REITs during 3Q17

as the sector posted a 7.3% gain. The 18.5% total return

through the first three quarters of 2017 was the highest

among the major property types. Last year, nearly a 31.0%

return was realized. Analysts are generally upbeat on future

performance due to steady demand for modern big box

distribution warehouse space resulting from e‐commerce.

Often tied to industrial market performance, data

center REITs returned nearly 28.0% in contrast to

a 0.4% increase for self‐storage REITs during the

first nine months of 2017.

Apartment REITs posted a 0.7% loss during 3Q17 following a

6.0% gain during the first half of 2017. The 5.3% gain, as of

3Q17, represented the second highest return among the

major sectors. In 2016, the sector provided a 4.5% return to

investors. Despite growing supply and moderating rental

growth, investment continued to flow into the sector due to

steady demand, the increasingly high cost of home

ownership and favorable demographics.

Sluggish performance continued for office REITs during

3Q17, as the sector declined 0.8% following a 2.6% gain

during the first half of 2017. Last year, the sector returned

13.2% to investors. Analysts are increasingly concerned

regarding employment growth and the growing impact of

shared workspaces.

Investor sentiment for retail REITS has cooled, as they were

the worst performing sector through the first nine months

of 2017, posting a negative 10.8% return. The free‐standing

subsector returned 0.5% in contrast to declines of 15.2%

and 11.7%, respectively, within the shopping center and

regional mall subsectors.

Driven by a 4.7% return during September, returns in

lodging/resorts REITs gained 2.7% during 3Q17. In 2016, a

24.3% return was achieved. Although steady business and

leisure travel is projected to support occupancy and RevPAR

gains, the increasing cost and availability of labor continue

to be primary concerns.

Below is a graph illustrating total returns by property sector from

2014 through the first three quarters of 2017.

FTSE NAREIT REIT Performance by Sector

Stock Market Recap

The bull market continued to roar as leading stock market

indices continued to provide robust returns for investors and set

new record highs. During 3Q17, the Dow Jones Industrial

Average (DJIA) increased 4.9% and recorded its eighth

consecutive positive quarter of growth for the first time since

1997. Likewise, the S&P 500 also recorded its eighth consecutive

winning quarter and increased nearly 4.0%. The NASDAQ

increased 5.8% in 3Q17, its fifth straight positive quarter.

Despite ongoing political gridlock and recent natural disasters,

rising corporate profits and low interest rates continued to drive

stock market strength and bullish sentiment. Markets also may

have received a further lift from new details regarding President

Trump’s proposed tax reform plan, which includes pro‐growth

policies such as the proposed reduction of corporate taxes.

During 3Q17, information technology was the top performing

sector and consumer staples recorded the only sector decline.

On the positive, the energy sector rebounded.

The following chart highlights the annual returns of Equity REITs

in comparison to several of the leading stock market indices.

Source: Yahoo Finance: 2017 data is from January 1, 2017 to Sept. 29, 2017

‐30.0%

‐20.0%

‐10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Industrial Office Retail Apartments Lodging/Resorts

2014 2015 2016 YTD 2017

Index 2012 2013 2014 2015 2016 2017 2012‐2016

avgEquity REIT 19.7% 2.9% 28.0% 2.8% 8.6% 6.0% 12.4%

NASDAQ 14.6% 12.1% 13.4% 5.7% 8.9% 20.7% 10.9%

S&P 500 15.9% 38.3% 11.4% ‐0.7% 12.0% 12.5% 15.4%

DJIA 13.4% 29.6% 7.5% ‐2.2% 16.5% 13.4% 13.0%



Capital Raising

At a time of continued low interest rates, REITs have continued

to benefit from investor demand for their attractive dividends by

raising money in financial markets. This wave of issuance has

been well‐received by investors.

After raising $43.2 billion during the first half of 2017, publicly

traded U.S. equity REIT capital raising escalated to $28.5 billion

during 3Q17. Last year, approximately $67 billion was raised.

Since 2016, the specialty sector (comprising data center, student

housing and communications REITs) raised nearly $22.7 billion,

followed by $ 11.7 billion raised by retail REITs, $10.1 billion

raised by the residential REITs (comprised of multi‐family, single‐

family, student housing and manufactured home REITs) and $9.8

billion raised by healthcare REITs. Diversified and office REITs

raised $6.0 billion and $4.6 billion, respectively. Senior debt

offerings totaled $38.4 billion, followed by $26.7 billion through

common stock offerings and $6.6 billion through preferred stock

offerings.

Below is a graph showing the capital raised by REITs since 2007.

Total Capital Raised by REITs (in billions)

Source: NAREIT/ SNL Financial (2017 represents Jan 1 – Sept. 29, 2017 capital raised)

Initial Public Offerings (IPOs)

According to SNL Financial and NAREIT, several REIT IPOs were

priced during 2017. Equity filings included the following.

In January, Invitation Homes (NYSE: INVH), the largest U.S.

home rental company, raised $1.54 billion. This stock

market debut was the largest by a REIT since Paramount

Group raised nearly $2.3 billion in 2014. Blackstone Group

LP founded Invitation Homes, which buys foreclosed homes

in bulk, in 2012, about five years after the housing market

decline. It is estimated that Invitation Homes oversees

nearly 50,000 homes, which are mainly located in the

western and southeastern U.S.

In March, Clipper Realty Inc. (NYSE: CLPR) completed its

$86.3 million IPO. The self‐administered and self‐managed

real estate company acquires, owns, manages, operates

and repositions multi‐family residential and commercial

properties in the New York metropolitan area, with its

initial portfolio concentrated in Manhattan and Brooklyn.

In June, Safety, Income and Growth, Inc. (NYSE: SAFE)

closed its $250 million IPO. SAFE, based in New York City, is

the first publicly traded company that focuses on acquiring,

owning, managing and capitalizing ground leases.

In June, Plymouth Industrial REIT (NYSE: PLYM) went public

with its IPO and raised an estimated $55 million.

Headquartered in Boston, the firm currently owns and

manages 40 buildings in eight states totaling about 5.8

million square feet.

Commercial Lending Loan origination dollar volume remains strong. The Mortgage

Bankers Association’s (MBA) Quarterly Survey of

Commercial/Multi‐Family Mortgage Bankers Originations

reported that 3Q17 commercial and multi‐family mortgage loan

originations increased 21.0% YoY and rose 8.0% QoQ.

Since 2Q17, loans for health care assets surged while loans

originated for government sponsored enterprises (Fannie

Mae and Freddie Mac) increased by the largest percentage

among investors.

YoY, loans originated for hotel assets recorded the largest

increase, while loans originated for retail assets recorded

the only decline.

Loans originated for life insurance companies decreased

YoY and increased for the other investor types.

Jamie Woodwell, MBA’s VP of CRE Research, stated, “Borrowing

and lending associated with commercial and multi‐family real

estate increased again in the third quarter, even as sales

transaction volume slowed. Most property types and capital

sources saw stronger lending activity than a year earlier,

supported by solid property fundamentals and continued

property value appreciation.”

According to the October 2017 Senior Loan Officer Opinion

Survey on Bank Lending Practices, banks reported that lending

standards for CRE loans secured by multi‐family residential

properties tightened while loan standards for non‐farm, non‐

residential properties and for construction and land

development purposes changed little during 3Q17. Banks also

reported that demand for CRE loans weakened during the

quarter.

A September 2017 finance survey from National Real Estate

Investor (NREI) revealed that capital sources, driven by local and

regional banks and life insurance companies, will have the same,

if not more, debt capital available in 2018. Local and regional

banks were identified as being the most significant source of

capital to the CRE sector followed by national banks, life

insurance companies and institutional lenders.

$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

$60

$65

$70

$75

$80

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Average 2007 ‐ 2016



The following chart summarizes lending activity by property and

investor type.

Source: Mortgage Bankers Association

Below is a graph depicting the frequency of commercial/multi‐

family loan originations since 3Q12.

Commercial/Multi‐Family Mortgage Bankers Origination Index

2001 Quarterly Average = 100

Source: Commercial Mortgage Bankers Association

Commercial Mortgage Backed Securities (CMBS) Market The revitalization of the CMBS market continues as a vital action

for the recovery of the commercial real‐estate market.

CMBS Issuances

According to data from Commercial Mortgage Alert (CMA),

CMBS issuances increased for the third consecutive quarter,

registering nearly $28.0 billion in 3Q17, the highest quarterly

output since 3Q14. According to Trepp, the hotel sector (36.0%)

accounted for the largest percentage of CMBS issuances,

followed by the office (27.0%) and retail (14.0%) sectors.

Through the first three

quarters of 2017, nearly

$67.0 billion of issuance

occurred, up about

34.0% YoY. In 2016, $76

billion of CMBS issuances

were priced.

2017 issuance has

exceeded analyst

expectations, who thought that the risk retention rules instituted

in late 2016 would slow issuance by negatively impact real

estate owner’s ability to refinance loans on their properties;

these rules require investment banks facilitating CMBS

transactions to retain a portion of each offering, or sell it to a

third‐party investor, as a way of ensuring that issuers hold some

responsibility for the deals they design. In contrast, investors

have increasingly purchased CRE debt, benefitted by low interest

rates, minimum volatility, tighter spreads than a year ago, and a

sizeable pipeline of loans in need of refinancing.

U.S. CMBS Issuances

Source: Commercial Mortgage Alert

CMBS Delinquency

According to Morningstar, CMBS delinquency rates fell for the

third consecutive month. The September 2017 U.S. CMBS

delinquency rate registered 2.94%, which is 4 BPS higher on a

YoY basis. Other notable information from the September report

is summarized below.

The delinquent unpaid balance for CMBS totaled $22.65

billion in September 2017, which was about $450 million

lower YoY.

By property type, multi‐family properties had the lowest

delinquency rates at 0.5%. Office and retail properties had

the highest delinquencies (6.4%) followed by industrial

(5.3%) and hotel (3.5%) assets.

Retail loan delinquencies, at 36.5% of the total, have been

the greatest contributor to CMBS delinquencies during the

past 12 months at $8.3 billion.

Type % Change since % Change since

3Q 2016 2Q 2017Property Type

Industrial 20.0% ‐25.0%

Multi‐Family 15.0% 12.0%

Office 8.0% ‐4.0%

Retail ‐8.0% 10.0%

Hotel 116.0% 6.0%

Health Care 97.0% 120.0%

Investor Type

CMBS/Conduits 42.0% 4.0%

Commercial Banks 21.0% 15.0%

Life Insurance Co. ‐2.0% ‐4.0%

GSE's (FNMA/FHLMC) 22.0% 31.0%

Overall 21.0% 8.0%

Lending Activity 3Q 2017

0

30

60

90

120

150

180

210

240

270

300

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

Average

$0

$40

$80

$120

$160

$200

$240

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

3Q17

($ Billions)

2000 ‐ 2016 Annual Average

FirmIssuance

($Mil)Market Share

J.P. Morgan $9,069 13.6%

Goldman Sachs $8,474 12.7%

Wells Fargo $8,163 12.2%

Citigroup $7,960 11.9%

Deutsche Bank $7,460 11.2%

Morgan Stanley $6,940 10.4%

Source: Commercial Mortgage Alert

Top U.S. CMBS Underwriters

Through 3Q17



Office loan delinquencies accounted for 34.0% of the total,

but decreased $298 million or 3.8% YoY to $7.6 billion.

Multi‐family loan delinquencies, representing 7.5% of the

total, decreased 5.4% YoY to $1.8 billion.

Industrial loan delinquencies, representing 5.0% of the

total, increased 1.8% YoY to $1.1 billion.

Hotel loan delinquencies, representing 10.5% of the total,

increased 2.6% YoY to $2.3 billion.

Delinquencies from deals issued from 2005 through 2008

represented 89.1% of all delinquencies by balance.

For the remainder of 2017, $4.4 billion of CMBS loans are

expected to mature with an average payoff rate of 70.0%.

Below is a chart depicting monthly CMBS delinquencies since

September 2012.

CMBS Delinquency Balance vs. Percentage

Source: Morningstar

Property Sector Overviews Office

Office vacancies as of 3Q17 remained unchanged at 10.3%

on both a YoY and QoQ basis. (CoStar)

YoY, asking rental rates increased 3.7%, marking the sixth

consecutive year of growth. CoStar reported that Class A

asking rental rates were about $9.00/sf higher than for

Class B space.

According to leading brokerages, tenants continued to

expand and lease increasing amounts of space in areas with

large concentrations of technology companies.

Nearly 154 million square feet (msf) was under construction

as of 3Q17, a YoY decrease of 3.0%. The largest projects are

in Manhattan, where development continued on six

buildings greater than 1.5 msf, including 3 World Trade

Center, 30 Hudson Yards and 1 Manhattan West. In San

Francisco, development is nearing completion on Salesforce

Tower (1.45 msf) and First Street Tower (1.25 msf). (CoStar)

Roughly 112,000 jobs were created in the office‐using

employment sectors during 3Q17, down 55.0% YoY. Since

2016, approximately 445,000 new office‐using employment

jobs were added, off nearly 20.0% YoY.

Office Market: Rents vs. Vacancy Rates

Source: CoStar (reflects select markets)

About 66 msf was completed during the first three quarters

of 2017, an increase of 10.0% YoY (CoStar). Highlighting

activity, Apple Park, a 2.8‐msf headquarters campus for

Apple, in Cupertino, CA, was completed. Other notable

deliveries included 150 North Riverside Drive (1.3 msf) in

Chicago and the Toyota Motor Corp. Headquarters Building

(1.05 msf) in Plano, Texas.

Through the first three quarters of 2017, net absorption

softened from 88.0 to 50.0 msf YoY. Since 2016, nearly all

the absorption was recorded in suburban markets (48.0

msf) and more absorption was recorded for Class A assets

(30.7 msf) than Class B & C assets (19.3 msf). (CoStar)

Below is CoStar’s ranking of key market indicators among the

largest office markets.

1.5%

2.5%

3.5%

4.5%

5.5%

6.5%

7.5%

8.5%

$20

$25

$30

$35

$40

$45

$50

$55

$60

Sep‐12 Jan‐13 May‐13 Sep‐13 Jan‐14 May‐14 Sep‐14 Jan‐15 May‐15 Sep‐15 Jan‐16 May‐16 Sep‐16 Jan‐17 May‐17 Sep‐17

($ Billiions)

CMBS Delinquency Balance CMBS Delinquency %

Delinquency Balance Average

Delinquency % Average

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

$22.50

$23.00

$23.50

$24.00

$24.50

$25.00

$25.50

$26.00

$26.50

$27.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 3Q17

Asking Rent Overall Vacancy Rate

Dallas/Ft Worth 4.21 Long Island 7.0% Dallas/Ft Worth 6.45

Washington D.C. 3.33 San Francisco 7.1% Los Angeles 2.76

Boston 2.75 Tampa/St. Pete 7.3% Chicago 2.75

Seattle 2.05 Seattle 7.3% Denver 2.63

Philadelphia 1.86 Minneapolis 7.5% Houston 5.50

Chicago 1.19 St. Louis 7.6% Washington D.C. 2.40

Phoenix 1.56 Boston 7.9% Boston 2.28

Detroit 1.54 Kansas City 7.9% Atlanta 2.24

Kansas City 1.44 New York City 8.2% Seattle 1.73

Baltimore 1.23 Philadelphia 8.3% Phoenix 1.64

Best Performing Markets

Vacancy Rate

Million SF

YTD Net AbsorptionYTD Construction

Deliveries

Million SF

3Q17 Top 25 Office Markets Comparison



Industrial

Unrelenting demand for modern distribution space, a

strengthening manufacturing sector and improving global

trade continued to benefit the industrial sector.

Vacancy rates remained at 5.2% during 3Q17, but have

declined 40 BPS YoY and continue to trend near historically

low levels (CoStar). As a result, there has been continued

upward pressure on asking rental rates, which are above

the pre‐recession peak.

Despite healthy market fundamentals, absorption has

slowed. Occupied space increased by nearly 56 msf during

3Q17, lagging the 75 msf average recorded the first half of

2017 (CoStar).

Industrial Market: Rents vs. Vacancy Rates

Source: Costar (reflects select markets)

To satisfy growing demand, developers delivered about 67

msf in 3Q17, similar to levels recorded during the first half

of the year. Significant completions included of a 2.0‐msf

Amazon fulfillment center in Jacksonville, FL, a 1.8‐msf Giti

Tire Plant in Chester, SC and a 1.2‐msf auto plant for

Mercedes‐Benz in Birmingham, AL (CoStar).

About 272 msf was under construction as of 3Q17, a 21.0%

YoY increase. Significant projects continue for automakers

including Tesla (3.8 msf) in the Reno/Sparks, NV market and

Volvo Cars (2.4 msf) in the Charleston, SC market.

Additionally, a 1.2‐msf Dollar General distribution center in

the Atlanta, GA market is under development (CoStar).

Per CoStar, Wayfair, Inc., ASOS, Shaw Carpets, Faraday

Future, Amazon, Supply Chain Solutions, Ikea, JC Penney,

NFI Industries, Emser Tile, JJ Haines all executed leasing

transactions of at least 500,000 sf during 3Q17.

Due to limited available modern product, “last mile”

distribution facilities, many of which are older facilities in

infill and secondary locations, continue to emerge and

shorten the supply chain and to facilitate the faster delivery

of goods to consumers and businesses.

Supported by the $5 billion Panama Canal expansion, U.S.

seaport and inland port markets continue to drive industrial

development and experience significant growth in inbound

container volumes.

Sustained demand from third‐party logistics services (3PLs)

and logistics/big‐box users have continued to support

robust leasing activity near inland hubs, seaports and

secondary locations with good transportation

infrastructure.

E‐commerce, which now accounts for nearly 9.0% of total retail

sales, is a significant economic driver that has driven demand for

industrial space as retailers continue to adjust their supply chain

policies to ensure faster delivery times.

E‐Commerce as a Percentage of Total Retail Sales

Source: Census Bureau

Below is CoStar’s ranking of key market indicators among the

largest industrial markets.

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

$5.40$5.50$5.60$5.70$5.80$5.90$6.00$6.10$6.20$6.30$6.40$6.50$6.60$6.70$6.80$6.90$7.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 3Q17

Asking Rent Overall Vacancy Rate 0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

2Q01

4Q01

2Q02

4Q02

2Q03

4Q03

2Q04

4Q04

2Q05

4Q05

2Q06

4Q06

2Q07

4Q07

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

4Q11

2Q12

4Q12

2Q13

4Q13

2Q14

4Q14

2Q15

4Q15

2Q16

4Q16

2Q17

(billions)

Retail Sales E‐Commerce Sales E‐Commerce Percentage

Atlanta 16.25 West Michigan 1.8% Dallas/Ft Worth 21.05

Dallas/Ft Worth 14.36 Los Angeles 2.2% Chicago 18.17

Chicago 13.94 Orange County CA 2.7% Inland Empire CA 14.83

Philadelphia 13.31 Detroit 3.3% Atlanta 13.30

Inland Empire CA 11.57 Seattle 3.4% Philadelphia 9.98

Phoenix 6.81 Cincinnati 3.6% Houston 7.97

Houston 5.87 Cleveland 3.9% Northern NJ 6.39

Cincinnati 4.89 Greensboro 4.0% Indianapolis 5.42

Northern NJ 4.85 Long Island 4.1% Los Angeles 5.27

Charlotte 4.52 Minneapolis 4.2% Phoenix 4.86

3Q17 Top 25 Industrial Markets Comparison

Million SF Best Performing Markets Million SF

YTD Net Absorption Vacancy RateYTD Construction

Deliveries



Retail

Retail sales rebounded considerably in September, but the

increase was mainly attributed to hurricane disruptions.

Despite an increasing number of retail closings and

bankruptcies, the overall retail vacancy rate moved little

during the first half of 2017 and fell 20 BPS YoY to 4.9%, as

of 3Q17 (CoStar). The neighborhood and community

shopping center sector, which comprises about 70.0% of

total inventory, had higher vacancy rates than the mall and

power center sectors.

CoStar reported that asking rental rates increased about

5.0% YoY.

Retail Market: Rents vs. Vacancy Rates

Source: CoStar (reflects select markets)

Cautious developers continued to wait for projects to be

extensively pre‐leased before breaking ground, preventing

more vacant space from entering the market. Most of retail

product being delivered is in single‐tenant formats in

favorable demographic areas.

As consumers continued to shop online more, shift

spending habits to more travel and experience‐related

activities, and shop more at discount and off‐price retailers,

numerous retailers filed for Chapter 11 bankruptcy

protection during 2017. In September, Toys “R” Us filed the

third largest retail bankruptcy according to

bankruptcydata.com.

Source: CNBC

As the supply of physical stores continues to overshadow

shopper demand, retailer profits have continued to be

negatively impacted, contributing to a surge of store

closings. Through the first three quarters of 2017, it was

estimated that more than 6,000 store closings were

announced. At the current rate, this will surpass the high

set during recession.

Source: Fung Global Retail & Technology

Dollar store chains (such as Dollar General and Dollar Tree),

national discounters (such as TJ Maxx, Ross and Walmart),

off‐price retailers (such as Nordstrom Rack and Saks Off 5th)

and new grocery chains (Aldi and Lidl) continue to be the

primary drivers of brick and mortar retail growth. Significant

U.S. store openings are summarized below.

Source: Fung Global Retail & Technology

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

$14.00

$14.50

$15.00

$15.50

$16.00

$16.50

$17.00

$17.50

2008 2009 2010 2011 2012 2013 2014 2015 2016 3Q17


Company

Toys R Us (3Q17) Aerosoles (3Q17)

Vitamin World (3Q17) Perfumania (3Q17)

Alfred Angelo* (3Q17) True Religion Apparel (3Q17)

Papaya Clothing (2Q17) Gymboree (2Q17)

rue21 (2Q17) Payless ShoeSource (2Q17)

Gander Mountain (1Q17) Gordmans Stores (1Q17)

RadioShack (1Q17) hhGregg (1Q17)

Vanity (1Q17) BCBG Max Azria (1Q17)

Eastern Outfitters (1Q17) Wet Seal (1Q17)

Limited Stores (1Q17) Marbles ‐ The Brain Store (1Q17)

*Chapter 7 Bankruptcy

Significant Retail Chapter 11 Bankruptcy Filings

Company Stores Company Stores

Radio Shack 1,000 American Apparel 110

Payless ShoeSource 700 Gordman's Stores 101

Rue21 400 Michael Kors 100

Ascena Retail Group 400 Macy's 100

Sears and Kmart 358 The Children's Place 100

Gymboree 330 Aerossoles 74

The Limited 250 Gap 70

hhgregg 220 Staples 70

GameStop 190 CVS 70

Bebe Stores Inc. 180 Aaron's 70

Wet Seal 171 Perfrumania 64

Crocs 160 Alfred Angelo 61

J.C. Penney 138 Guess 60

BCBG Max Azria 120 Vitamin World 50

Signifcant Announced Retail Store Closings

Company Stores Company Stores

Dollar General 1,290 Ross Stores 90

Dollar Tree 650 Gap 90

Aldi 400 Sephora 70

TJX 111 H&M 60

Five Below 100 Hobby Lobby 60

Ulta 100 Walmart 59

Lidl 100 Dick's Sporting Goods 43

Signifcant Announced Retail Store Openings



Apartment

According to Reis, Inc., the national vacancy rate increased

10 BPS in 3Q17 to 4.5%, its highest level in five years,

recording its fourth consecutive quarterly increase. It is

likely that this increase resulted from added supply rather

than falling demand.

Despite the uptick in available units, average asking rental

rates grew by 1.0% QoQ during 2Q17 and 3.8% YoY

according to Reis, Inc. Effective rents increased 0.9% QoQ

and 3.3% YoY.

According to RealPage, Inc., annual rental rate

growth for new leases was strongest in the

Sacramento, Las Vegas, Orlando, Minneapolis/St.

Paul San Diego and metropolitan areas.

Like last quarter, less aggressive landlord concessions

resulted in higher effective rents, as steady demand

continued, partly due to elevated housing prices keeping

more potential home buyers in rental units.

Apartment deliveries totaled about 47,270 units during

3Q17 (Reis, Inc.), up from the 43,850‐quarterly average

during the first half of the year. In 2016, about 213,000

units were completed.

Apartment Market: Rents vs. Vacancy Rates

Source: Reis, Inc.

Net absorption totaled about 31,350 units during 3Q17,

similar to the prior two quarters (Reis, Inc.). Still, absorption

is considerably below the pace set last year when nearly

210,000 units were absorbed.

Demand continues to be primarily driven by new

millennial household formations, downsizing baby

boomers, existing renters who cannot qualify for a

mortgage.

According to a recent study by Freddie Mac,

consumers have shown an increased preference

for renting with more planning to rent their next

home. It was also reported that new renter

households have risen by 9 million during the past

10 years, the largest gain ever recorded over that

time span.

Hotel

YoY, Smith Travel Research (STR) reported that the U.S.

hotel industry’s occupancy increased 0.5% to 71.4%, its

average daily rate increased 1.4% to nearly $129.12 and

RevPAR increased 1.9% to about $92.20 during 3Q17.

STR reported that occupancy levels were the highest for a

third quarter since 1995 despite the supply of hotel rooms

growing by the fastest rate YoY rate since 2Q10. Less

encouraging, ADR growth was the lowest since 4Q10 and

RevPAR increased at its lowest rate since 1Q10.

According to STR, there were about 1,440 U.S. projects,

totaling approximately 188,479 rooms, in the construction

stage as of September 2017. This represents a 5.7% YoY

increase. STR reported that there wasn’t a noticeable

decline in activity around hurricane‐affected markets other

than Houston.

New hotel construction continues to be focused within the

upscale segment, which includes select‐service and

extended‐stay hotels. In contrast, economy class projects

have been limited due to rising construction costs and

lower performance metrics.

Among the top markets, New York (13,533) had

the largest number of projects in the construction

phase, followed by the Dallas (7,047), Nashville

(5,497), Las Vegas (5,125), Los Angeles/Long

Beach (4,860), Houston (4,494) and Boston

(4,310) markets.

Lodging Market: RevPAR, ADR & Occupancy

Source: Smith Travel Research

Of the top 25 markets, STR reported that Houston was the

only market to record double‐digit growth in occupancy and

RevPAR. Other top RevPAR increases were reported in the

Orlando, Tampa/St. Petersburg, Nashville and Detroit

markets. Nashville also posted 3Q17’s highest increase in

ADR. New York City posted the highest absolute value in

each of the three key performance metrics, while the

Philadelphia market experienced the largest declines in

occupancy, RevPAR and ADR.

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

$950

$1,000

$1,050

$1,100

$1,150

$1,200

$1,250

$1,300

$1,350

2008 2009 2010 2011 2012 2013 2014 2015 2016 3Q17


50%

52%

54%

56%

58%

60%

62%

64%

66%

68%

70%

72%

74%

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

2008 2009 2010 2011 2012 2013 2014 2015 2016 3Q17

OccupancyRevPAR, ADR

RevPAR ADR Occupancy %



Forecast Economic

After the Fed kept the federal funds rate unchanged in

September, indications are that a December rate hike is

likely despite low inflation.

GDP growth is expected to trend near 2.5% during the next

several quarters, driven by sustained personal spending,

healthy corporate expenditures and improved global trade

conditions.

An unbalanced housing market is expected to persist in the

near‐term as historically low inventory levels will not be

able to satisfy demand, sending prices higher and creating

hurdles for first‐time homebuyers and those seeking more

affordable homes.

Job creation is projected to moderate as the labor market

tightens and trends toward full employment. On the

positive, wage growth is expected to accelerate.

Inflation is expected to trend below the Fed’s 2.0% target

during 4Q17 as energy, automobile and food price increases

remain modest.

General Property

In the near‐term, a divide between seller expectations and

buyer valuations will continue to weigh on sales volume

despite a large amount of “dry powder” and capital held by

potential investors.

REITs are expected to continue attracting the interest of

investors, but returns may be challenged by rising interest

rates. Specialized REIT sectors expected to outperform in

the upcoming quarters include medical office, data center,

self‐storage and student housing.

Spreads between capitalization and interest rates are likely

to compress further with anticipated interest rate hikes.

CMBS issuance is forecasted to remain elevated in the near‐

term due to low interest rates, a healthy pipeline of loans in

need of refinancing, and the lessening impact of risk‐

retention regulations

Property Sector

Retail: Although most purchases are done in stores, large

numbers of brick and mortar retail closures will continue to

significantly impact the retail landscape. As landlords face

more pressure to fill these vacancies, new tenants are

expected to ask for more flexible lease terms and more

concessions. Developers will continue to reposition

older/obsolete retail assets into new, consumer driven

venues featuring more food and entertainment concepts

and non‐traditional tenants.

Apartment: Favorable demographic drivers are expected to

keep demand for rentals strong for the foreseeable future.

Burdened by high student loan debt, millennials will

continue forming new households at a healthy rate, but will

continue delaying home purchases, while more empty

nester baby boomers will look to downsize into amenity‐

filled rentals. Economically, rising home prices will continue

to present affordability challenges to ownership and force

potential buyers to remain in rental housing.

Office: A tighter labor market is projected to challenge

gains in office‐using job sectors as positions become more

difficult to fill. As elevated levels of new construction are

delivered, downward pressure on rental growth and an

uptick in vacancy rates are expected in select markets.

Suburban and secondary locations, where pricing has not

appreciated as quickly as in CBD locations, will continue to

generate greater interest from investors and tenants,

resulting in healthy levels of absorption.

Industrial: Steady demand for modern distribution

space/fulfillment centers, resulting from strong e‐

commerce sales, will continue to result in supply chain

modernization to ship product to consumers in the fastest

and most efficient way. Although vacancy rates are

expected to increase due to greater speculative supply

placed on the market, absorption is expected to remain

robust and rental rate appreciation will persist.

Hotel: Slower RevPAR and ADR growth is anticipated. The

Trump administration’s travel restrictions and immigration

policies could limit future international travel to the U.S.

and may negatively impact sentiment. Increased staffing

required to accommodate the elevated occupancy levels,

the rising cost of labor (higher salaries, wages and benefits)

and the continued rise of home sharing companies (with

lower overhead costs and less regulations) will represent

challenges to leading hotel flags.

FTI INSIGHTS Economic & Real Estate Report –3rd Quarter 2017

EXPERTS WITH IMPACTTM About FTI Consulting

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www.fticonsulting.com

©2017 FTI Consulting, Inc. All rights reserved.

Marc R. Shapiro

+1 973 852 8154

[email protected]

Mark E. Field

+1 973 852 8157

[email protected]

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