U.S. Commercial Real Estate Market Forecast - Summer Update

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The US Commercial Real Estate Market Forecast: Summer Update July 2014 Auction.com Research

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Slides from the U.S. Commercial Real Estate Market Forecast Summer Update webinar by Peter Muoio, Head of Auction.com Research.

Transcript of U.S. Commercial Real Estate Market Forecast - Summer Update

Page 1: U.S. Commercial Real Estate Market Forecast - Summer Update

The US Commercial Real Estate Market Forecast: Summer Update

July 2014

Auction.com Research

Page 2: U.S. Commercial Real Estate Market Forecast - Summer Update

Outlook for US Economy

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US Growth Should Improve in Coming Years

»  Reduced uncertainty helps spur private sector spending and investment. »  Improving wealth provides tailwind to consumer spending. »  Recovering housing market contributes to growth. »  US energy boom boosts domestic manufacturing and exports. »  Europe slowly pulls out of recession, aiding export volume.

GDP Gradually Accelerates Job Growth Picks Up as Economy Improves

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Risks to the Outlook

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Geopolitical Risks High  

»  Market discounting risk emanating out of Russia »  Potential impact of sanctions/trade disruption on Europe »  Geopolitical instability across many parts of the globe: Europe/emerging markets/Ukraine/Middle

East/Venezuela and Argentina »  Unclear if China growth picks up? Additionally: »  Housing market recovery could stall »  Tapering is not smoothly executed or market reacts poorly to tapering moves/statements »  Tech bubble?

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Macro Overview: Growth Slowed in the Winter but Has Thawed

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Economic Growth Made Significant Headway in 2013, Slowed in 1st Quarter, Now Stronger

Slowdown in GDP reflects the key risks we had identified: »  Housing ebb led to drag from residential investment. »  Slowdown in China and weakness in Japan helped drag down exports, while Europe ex UK still

slow. »  Weather also played a very big role.

GDP Growth Slowed in the First Quarter, Exports, Investment and Weather Were Key Drags

Monthly Job Growth Solid After a Few Weak Months

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Lower Uncertainty Could Help Unleash Household Spending and Business Investment

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High Level of Uncertainty Between 2008 and 2012 Was a Key Impediment to Growth, Lower Uncertainty Will Help Boost Spending and Investment

Sources: Steven Davis, Scott Baker and Nicholas Bloom, Maximus Advisors

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Single Family Looks to Be Thawing After Severe Winter

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After Step Back, Recovery Appears to Be Heating Up

Existing Home Prices Up After Some Softness New and Existing-Home Sales Starting to Pick Back Up

Sources: Census, NAR, Zillow, FHA, S&P, Maximus Advisors

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US Households Benefitting from Tailwind of Rising Financial and Residential Wealth

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Household Wealth Has Surpassed Pre-Financial Crisis Level; Increase in Home Values Played Huge Role in 1st Quarter Increase

Sources: Federal Reserve, Maximus Advisors

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Consumer Situation Still Generally Positive

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Consumer Attitudes and Spending Emerging from Depths of Great Recession and Financial Crisis

Consumer Confidence Emerging from Deep Drop… …Propelling Consumer Spending

Sources: Conference Board, Census, Maximus Advisors

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Natural Gas Prices Much Lower in US, Giving Manufacturers a Cost Advantage

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Estimated Landing Prices Show Natural Gas is Far Cheaper in US

Sources: FERC, Maximus Advisors

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Nearly All Major Metros Have Grown Over the Past Year

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Detroit and DC Only Metros with Employment Down Year Over Year

Sources: BLS, Maximus Advisors

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Economic Momentum Heatmap

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Most Metros Have Good Economic Prospects

Source: Maximus Advisors

•  Economy ratings range from 1 (very strong) to 6 (very weak) based on our analysis of current and near-term economic momentum.

•  Individual box size is based on market population.

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Real Estate Capital Markets

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Transaction Volume Back to Healthy Level and on a Generally Upward Trajectory

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Total Deal Volume Ranging at Healthy Level, Up 19% from a Year Ago

Sources: BLS, Maximus Advisors

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Cap Rates Resisted Upward Interest Rates

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Interest Rates Started to Climb in 2013 but Cap Rates Were Range-Bound to Lower

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Sources: Federal Reserve, Maximus Advisors

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Apartment Segment

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Residential Demand Dynamics in Flux

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Homeownership Showing Signs of Stabilizing; Household Formation Rate Still Weak

Sources: Census, Maximus Advisors

Homeownership Gliding Toward Stabilization… …But Reported Household Formation Rate Has

Fallen to Unbelievable Recession Levels

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Generation Y Numbers Some 80 Million and Represents Huge Untapped Reservoir of Apartment Demand

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But This Cohort Faces Significant Headwinds

Sources: Census, Maximus Advisors

…And Nearly One-Third of 18-34 Year Olds Are Living With Their Parents

Young Adult Jobless Rate Has Made Significant Headway Despite Recent Choppiness, but

Remains High …

»  “Generation Y” will have a massive impact on the residential market, numbering about as large as the baby boom.

»  High student debt load remains a key uncertainty in young adult household formations and single-family demand.

»  Urban focus may change ownership/rental and suburban/urban housing demand mix.

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1-Family Affordability Good but Rising Rates and Prices Caused Some Erosion

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Rent vs. Buy Seesawing

Several factors still inhibiting single-family demand: »  Lack of mortgage credit »  Damaged credit scores »  Home viewed as risky investment »  Owning limits liquidity and mobility.

Rising Rates and Prices Diminishing Affordability … … Shifting Home Price-to-Rent Ratio Near Balance, Slightly Favoring Renting

Sources: Census, MBA, NAR, Maximus Advisors

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Apartment Fundamentals Very Healthy

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Vacancies Have Fallen to Very Low Level, Generating Solid Rent Growth

Sources: Reis, Maximus Advisors

Vacancies Sitting Around 4% Apartment Effective Rent Growth Strong

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New Development Cycle Underway but Oversupply Is Not an Issue at this Time

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Multifamily Starts Up from Modern Record Low but Not at Overbuilding Level

Sources: Reis, Maximus Advisors Forecasts

Multifamily Starts Up, Portending Future Supply

Multifamily Starts Likely to Continue to Increase in Near Term Amid Low Vacancies and High and Rising

Rents

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Apartment Vacancies Low but Approaching Stabilization as Supply Picks Up

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Apartment Segment Is a Standout

Sources: Reis, Maximus Advisors Forecasts

Apartment Vacancies Will Trough at Very Low Level in 2016

US Apartment Rents Will Continue to Rise Despite An Uptick In Vacancies In Later Years

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Apartment Markets Look Strong Over Next Few Years

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Pink Markets Reflect Development Further Along

Source: Maximus Advisors

•  Economy ratings range from 1 (very strong) to 6 (very weak) based on our analysis of current and near-term economic momentum.

•  Individual box size is based on market apartment inventory.

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Office Segment

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Office Recovery Pace Will Mirror Strength of Economy; Shadow Inventory Erased

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Office Job Growth Back on Track; With Shadow Space Erased, Absorption Should Strengthen

Sources: Reis, Maximus Advisors Forecasts

Office Jobs Growing Strongly Again Office Job Growth Over Past 4 Years Has Worked Off Shadow Space

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Office Recovery Has Been Tepid

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Vacancies Slightly Off Peak; Rents Just Above Floor

Sources: Reis, Maximus Advisors

…Constraining Rent Growth To Minimal Gains Office Vacancies Just 80 bps Off Their Peak….

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Office Recovery Will Pick Up Steam with the Economy

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Vacancies Have Peaked and Rents Have Troughed; Stage Set for Stronger Recovery

Sources: Reis, Maximus Advisors forecasts

Office Recovery Should Start to Accelerate Office Rents Will Grow Slowly Until Demand Picks

Up and Brings Vacancies Down More Rapidly

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Regional Clusters of Strong Office Markets

27 Sources: Maximus Advisors

•  Our forward view of segment fundamentals on scale of 1/dark green (very strong) to 6/dark red (very weak).

•  Individual box size based on market office inventory.

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Retail Segment

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Retail Segment Is Drifting

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No Signs of Momentum

Sources: Reis, Maximus Advisors

Retail Effective Rents Soft Retail Vacancies Remain Elevated

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Retail Recovery Also Awaits Stronger Macro Growth but Will Continue to Have Headwinds

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Vacancies Will Decline Swiftly Once Demand Accelerates but Remain Above Previous Cycle Level

Sources: Reis, Maximus Advisors forecasts

Absence of Development Will Assist the Retail Recovery but Economy Must Cooperate Rents Will Be Slow to Recover Amid High Availability

»  Brick & mortar retail remains under intense pressure from e-retail. »  Impact comes in form of store closings and changed footprint of stores.

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Many Retail Markets Drifting; Demographics Are Destiny

31 Sources: Maximus Advisors

•  Our forward view of segment fundamentals on scale of 1/dark green (very strong) to 6/dark red (very weak).

•  Individual box size based on market retail inventory.

Strong Pockets in Texas and Coasts

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Industrial Segment

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Industrial Drivers Healthy

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Underlying Industrial Demand Drivers Bounced Back, Appear Primed for Continued Strength

Sources: Census, Federal Reserve, Maximus Advisors

»  Industrial sector benefitting immensely from shift to e-retail.

»  Expansion of Panama Canal will benefit US East Coast ports.

Capacity Utilization Nearing Normal, Healthy Level

New Capital Goods Orders Strong

Industrial Production Has Surpassed Prior Peak

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Another Hiccup for Trade

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Improvement in Europe and China Economies Would Help Propel Further Gains

Sources: Census, Maximus Advisors

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If Demand Holds Up, Industrial Vacancies Will Drop Rapidly

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Strong Absorption May Simmer Down but Vacancies Look to Decline; Development Likely to Pick Up

Sources: Reis, Maximus Advisors forecasts

Industrial Vacancies Will Continue to Improve Amid Solid Demand and Limited Supply Industrial Rents Will Accelerate as Vacancies Fall

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Industrial Markets Improving but Starting to See Supply Pick Up

36 Sources: Maximus Advisors

•  Our forward view of segment fundamentals on scale of 1/dark green (very strong) to 6/dark red (very weak).

•  Individual box size based on market industrial inventory.

Larger Industrial Markets Among Healthiest

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Hospitality Segment

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Key Drivers of Hospitality Demand Growing

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Drivers of Hospitality Demand Look Good

Sources: BEA, GBTA, Maximus Advisors

Consumer Spending on Hotels & Motels Has Been Strong

Business Travel Trips Edged Down in 2013 but Spending Was Up; Both Trips and

Spending Look to Grow in 2014

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Key Drivers of Hospitality Demand Growing

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Hiccup in Foreign Travel Spending Mirrors Exports Slowdown

Sources: ITA, Maximus Advisors

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Hospitality Healthy

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Room Demand Remains Strong, Up a Healthy 3.7% from a Year Ago; Supply Continues to Increase Modestly

Sources: STR, Maximus Advisors

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Occupancies Stand at Healthy Level, Enabling Hotel Operators to Raise Rates

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Occupancies Have Resumed Upward Momentum; ADRs & RevPAR Growing

Sources: STR, Maximus Advisors

Occupancies Healthy Room Rate and RevPAR Maintain Healthy Growth

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Outlook for Operating Conditions

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Expansion Should Stay on Track but Slow as It Matures

Sources: STR, Maximus Advisors forecasts

Occupancies Will Continue Their Upward Trajectory

Room Rate and RevPAR Growth Will Cool to Still-Healthy Pace in Coming Years

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Most Hospitality Markets Have Strong Prospects

43 Sources: Maximus Advisors

•  Our forward view of segment fundamentals on scale of 1/dark green (very strong) to 6/dark red (very weak).

•  Individual box size based on market hotel inventory.

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Peter  Muoio,  Ph.D.  646-­‐352-­‐9510  pmuoio@auc<on.com    

For  our  latest  insights  follow  us  at:  www.auc4on.com/blog  Twi9er:  @MaxRockResearch  Facebook:    MaxRockResearch  Linkedin:  Maximus  Advisors    www.auc4on.com