#CAROutreach

SPEAKERCHARLES H. WURTZEBACH, PhDChair, Department of Real Estate and Douglas and Cynthia Crocker Endowed Director of the Real Estate Center at DePaul University

Market Outlook 2017Charles H. Wurtzebach, PhD

Chairman, Department of Real Estate andDouglas and Cynthia Crocker Endowed Director,

The Real Estate Center, DePaul University January 12, 2017

1. Technological Advances2. Legislative Mandates3. Capital Market Developments

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What Key Factors Will Affect The Near Term Real Estate Market?

Historically, imprecision of forecasting led to higher and less variable cap rates to compensate for vague analysis of operational, financial, and capital market risk

Search process cumbersome, technology really helping

Data vendors married technology, data, and advisory services; Altus Group, PPR, CoStar, Real Capital Analytics, REIS, Megalytics, etc.

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Technological Advances

What will Trump Administration do?Regulation/DeregulationFederal Tax Code

Locally not much change expected (except RE taxes!)

ZoningBuilding CodesEminent Domain

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Legislative Mandates will Change the Market

Capital markets respond to Legislation and Fed policy – expect continued increase in interest rates in 2017

New investors with different risk/return requirements enter market; sovereign wealth funds, pension funds, wall street, REITs

As Trump Administration effects change in the current state of play, capital market players and investors (Wall Street) will respond

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Capital Market Developments

Real estate competes with other assets; 200-400 Basis points over 10-year Treasury.

So as rates go up, required return on CRE goes up

Investors like long-term cycle of private CRE: 12-15 year boom, 2-3 year bust cycle: 1978-1990, 1993 –2007, 2010 - ?

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Capital Market Developments (Cont.)

Will oversupply rear its ugly head?• Short answer, yes, although so far so good.

Starts are up, but not near previous highs. • Recent multifamily starts rising• Single family lags

Will capital lose discipline in search of profits?• As cap rates drop, prices rise, will rent continue

to rise?• The Federal Reserve’s stance on interest rates

suggests 2-3 more rate changes in 2017 – assuming no hiccups in the economy

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Where are we now, where are we headed?

Will changes in commercial tenant needs permanently dampen demand?

• Per square foot per employee down as firms go to open plan and office benches

• CBD versus Suburban, locally suburban market out of favor, relative to CBD

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Where are we now, where are we headed? (Cont.)

Will millennial life style trends become as entrenched as baby boomer’s?

• Census Bureau says homeownership rate fell year low in 2015, to 63.9%

• All time high in 2009 of 69.4%*• Delay marriage and child-bearing

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Where are we now, where are we headed? (Cont.)

Recently (July 2016) Green Street Advisors, Inc., indicates that US commercial property prices have continued to increase steadily since the Great Recession lows recorded in May and June 2009

The NCREIF Property Index posted double-digit returns for the past six years (2010–2015), but the streak may come to an end in 2016

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Where are we now, where are we headed? (Cont.)

According to Zillow the median home value in the United States is $189,400. US home values have gone up 5.5% over the past year and Zillow predicts they will rise 2.9% within the next year.

The median price of homes currently listed in the United States is $239,900. The median rent price in the United States is around $1,525.

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Where are we now, where are we headed? (Cont.)

Calculating expected IRRs Marketing and Sales Using leverage of all types

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What are we good at?

Evaluating Risk – always tend to look in the rear view mirror

Intuition – “With cap rates at all time lows, the capital market will not save us.”

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What are we NOT good at?

Beware the extensive use of leverage – true double-edged sword

Beware emergence of non-bank lenders Beware Reverse Underwriting – Investors

target IRR, make assumptions that will result in that IRR

Capital Market or Pricing Discipline – Just say NO!

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Learn from Past Mistakes