Data Driven DecisionsInterest Rates, the Economy and CRE

Gulf Coast Real Estate & Economic Education Conference

Brian D. Bailey, CCIMSenior Technical Expert, Commercial Real EstateFederal Reserve Bank of Atlanta

August 18, 2016

Disclaimer: These views are those of the presenter and not necessarily those of the Federal Reserve Bank of Atlanta, or the Federal Reserve Board.

Economic Expansions

Average = 60 months

Source: National Bureau of Economic Research, Risk Analysis Unit/Federal Reserve Bank of Atlanta 2

Average = 93 months

0

2

4

6

8

10

12

14

16

18

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

U3 U6

Unemployment Rates

Source: Bureau of Labor Statistics, STL FRB FRED

Une

mpl

oym

ent R

ate

%

Current: 9.6%Pre Crisis: 8.4%

Current: 4.9%Pre Crisis: 4.6%

U.S. Sector Job Gains

Source: Bureau of Labor Statistics

U.S. Growth by Geography

Source: Bureau of Labor Statistics (Household Survey)

…and by Income Growth

Source: Quarterly Census of Employment and Wages/Bureau of Labor Statistics, Bureau of Economic Analysis

Source: McDash Analytics

Seriously Delinquent MortgagesHome Mortgages 90+ Past DueAs of 1Q 2016

Source: McDash Analytics

Seriously Delinquent MortgagesYear-Over-Year Change, Home Mortgages 90+ Past Due

Consumer Credit Delinquency RatesIncludes Auto, Credit Card, Home, Student LoansAs of 1Q 2016

Source: Federal Reserve Bank (FRB) of New York Credit Panel, Equifax; Risk Analysis Unit/FRB Atlanta

Consumer Credit Delinquencies Year-Over-YearIncludes Auto, Credit Card, Home, Student LoansAs of 1Q 2016

Source: FRB New York Credit Panel, Equifax; Risk Analysis Unit/FRB Atlanta

Sales and Months' Supply of New Single-Family Homes

11

0

2

4

6

8

10

12

14

0

200

400

600

800

1,000

1,200

1,400

1,600

2000 2002 2004 2006 2008 2010 2012 2014 2016

months, sa

thou

sand

s, S

AAR

New Home Sales

Months’ Supply

Source: U.S. Census Bureau through June 2016

Sales and Months' Supply of New Single-Family Homes

Residential Real Estate: Price Appreciation

Source: CoreLogic

Residential Real Estate: Price Appreciation

Source: CoreLogic

National Property Sector Vacancy Rates

Source: CBRE-EA, AXIOMetrics

Source: AXIOMetrics; Risk Analysis Unit/FRB Atlanta

Apartment Occupancy

Source: AXIOMetrics; Risk Analysis Unit/FRB Atlanta

Apartment Effective Rent Growth

Source: AXIOMetrics; Risk Analysis Unit/FRB Atlanta

Apartment Occupancy GrowthYear-Over-Year Change

Apartment Effective Rent GrowthYear-Over-Year Change

Source: AXIOMetrics; Risk Analysis Unit/FRB Atlanta

New Construction as a Percent of Stock

Source: AXIOMetrics; Risk Analysis Unit/FRB Atlanta

Apartment Sector DynamicsVariance from Long Term Average

Source: AXIOMetrics/Risk Analysis Unit/FRB Atlanta

Source: AXIOMetrics/Risk Analysis Unit/FRB Atlanta

Office Sector DynamicsVariance from Long Term Average

Source: AXIOMetrics/Risk Analysis Unit/FRB Atlanta

Industrial Sector DynamicsVariance from Long Term Average

Supply vs. 15-Year Averages

National New Supply vs. Longer Term Average

Source: CBRE-EA, Risk Analysis Unit/FRB Atlanta 23

Com

plet

ions

as

a %

of E

xist

ing

Inve

ntor

y

42%AboveAvg.

4%AboveAvg.

31%BelowAvg.

59%BelowAvg.

Finance

Commercial Real EstateForeign Investment in CRE

Source: Real Capital Analytics

$0$10$20$30$40$50$60$70$80$90

$100

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Africa Asia Australia Europe Mid-East North America South America

Billi

ons

$ bi

llion

s

Source: Call Report

Commercial Real Estate Loans Outstanding at Banks$ billions, peak balances

$ bi

llion

s

Source: Securities Industry and Financial Markets Association (SIFMA); Risk Analysis Unit/Federal Reserve Bank of Atlanta

CMBS Originations

Source: Securities Industry and Financial Markets Association (SIFMA); Risk Analysis Unit/Federal Reserve Bank of Atlanta

0

50

100

150

200

250

300

19961997199819992000200120022003200420052006200720082009201020112012201320142015 2015Q2

2016Q2

Source: Trepp, Risk Analysis Unit/FRB Atlanta

CMBS 2016-2017 MaturitiesDelinquency Rates by Market

Bank SentimentPe

rcen

t of R

espo

nden

ts T

ight

enin

g

• In six of the last eight quarters, a net number of respondents reported tightening underwriting standards on multifamily loans.

• After a noteworthy slowdown in 2016Q1; Net Loan Demand appears to be improving in C&D and Nonfarm NonRes

Source: Federal Reserve; Risk Analysis Unit/FRB Atlanta

Perc

ent o

f Res

pond

ents

Rep

ortin

g In

crea

sed

Dem

and

for N

ew L

oans

Underwriting Net Loan Demand

Major Markets: Boston, Chicago, Los Angeles, New York City, San Francisco, Washington D.C.Source: RCA Analytics, Risk Analysis Unit/Federal Reserve Bank of Atlanta

2000

= 1

00

Major Market CRE Price Indices

364

301

199

253

157

-

50

100

150

200

250

300

350

400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Apartment Office Industrial Retail Suburban Office

Non-Major Markets: All Markets Except the Majors (Boston, Chicago, Los Angeles, New York City, San Francisco, Washington D.C.)

Source: RCA Analytics, Risk Analysis Unit/Federal Reserve Bank of Atlanta

2000

= 1

00

Non-Major Market CRE Price Indices

218

161159

155

136

-

50

100

150

200

250

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Apartment Office Industrial Retail Suburban Office

Commercial Real Estate PricesPrice Growth Rates

Source: Real Capital Analytics/FRB Atlanta Risk Analysis Unit.

1 Year Price Growth is slowing in both Major and Non-Major Markets

*RCA indices based on Property Sales > $2.5mm

Annu

al P

rice

Gro

wth

%

1%

7%

10%

4%

0%2%4%6%8%

10%12%14%16%

RCA Major Markets RCA Non-Majors Markets

1 Year 3 Year 5 Year LT Average

Commercial Real Estate PricesMajor vs. Non-Major Markets (Cumulative)

Source: Real Capital Analytics/FRB Atlanta Risk Analysis Unit.

Maj

orN

on-M

ajor

*on Property Sales > $2.5mm

7%

-7%

6% 8%1%

88% 89%

61% 61%52%58%

42%

8%20%

-5%-20%

0%

20%

40%

60%

80%

100%

Apartment Office Industrial Retail Suburban Office

1 Year 3 Year 5 Year From Pre-Downturn Peak

11%

-6%

4% 3% 3%

90%

62%52%

60%48%

27%

2%

-2%-11%

-16%-20%

0%

20%

40%

60%

80%

100%

Apartment Office Industrial Retail Suburban Office

1 Year 3 Year 5 Year From Pre-Downturn Peak

Summary

-Domestic ‘tailwinds’ are influencing the improvement in CRE; however, foreign ‘headwinds’ persist.

-Declining vacancy combined with limited near-term new supply appears to indicate continued rent growth on the horizon.

-The amounts of future new supply in some asset classes may be impacted by the evolution of technology and the changing uses of CRE. Greater space efficiency may translate to less need for new supply in certain sectors.

-Traditional funding sources are more hesitant lending in the CRE space. This is giving rise to alternative funding sources.

-Risk continues to evolve in both the CRE fundamental and lending environments

The views expressed here are my own and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

Thank you